Opinion ID: 2585839
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Heading Rank: 1

Heading: Selection of applicable law

Text: California has two different analyses for selecting which law should be applied in an action. When the parties have an agreement that another jurisdiction's law will govern their disputes, the appropriate analysis for the trial court to undertake is set forth in Nedlloyd, supra, 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 834 P.2d 1148, which addresses the enforceability of contractual choice-of-law provisions. Alternatively, when there is no advance agreement on applicable law, but the action involves the claims of residents from outside California, the trial court may analyze the governmental interests of the various jurisdictions involved to select the most appropriate law. As we shall explain, a trial court considering nationwide class certification might be required to utilize both analyses.
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.
In Phillips Petroleum Co. v. Shutts (1985) 472 U.S. 797, 105 S.Ct. 2965, 86 L.Ed.2d 628, the United States Supreme Court held that a forum state may apply its own substantive law to the claims of a nationwide class without violating the federal due process clause or full faith and credit clause if the state has a `significant contact or significant aggregation of contacts' to the claims of each class member such that application of the forum law is not arbitrary or unfair. [7] (Id. at pp. 821-822, 105 S.Ct. 2965; Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc. (1993) 14 Cal.App.4th 637, 649-650, 17 Cal.Rptr.2d 713.) But even where its own law may be constitutionally applied, California follows a three-step governmental interest analysis to address conflict of laws claims and ascertain the most appropriate law applicable to the issues where there is no effective choice-of-law agreement. ( Clothesrigger, supra, 191 Cal. App.3d at pp. 612-616, 619, 236 Cal.Rptr. 605; see generally Application. Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal. App.4th 881, 896, 72 Cal.Rptr.2d 73 [cases involving choice-of-law clauses present an exception to application of governmental interest approach]; Stoneivall Surplus Lines Ins. Co. v. Johnson Controls, Inc., supra, 14 Cal.App.4th at pp. 645-646, 17 Cal.Rptr.2d 713.) `[G]enerally speaking the forum will apply its own rule of decision unless a party litigant timely invokes the law of a foreign state. In such event [that party] must demonstrate that the latter rule of decision will further the interest of the foreign state and therefore that it is an appropriate one for the forum to apply to the case before it.' ( Bernhard v. Harrah's Club (1976) 16 Cal.3d 313, 317-318, 128 Cal.Rptr. 215, 546 P.2d 719, quoting Hurtado v. Superior Court (1974) 11 Cal.3d 574, 581, 114 Cal.Rptr. 106, 522 P.2d 666 (Hurtado) ; cf. Offshore Rental Co. v. Continental Oil Co. (1978) 22 Cal.3d 157, 163, fn. 5, 148 Cal.Rptr. 867, 583 P.2d 721 [cautioning against an unduly literal reading of quoted statements and noting that courts may make their own determination of the policies and interests of the involved states].) Under the first step of the governmental interest approach, the foreign law proponent must identify the applicable rule of law in each potentially concerned state and must show it materially differs from the law of California. The fact that two or more states are involved does not in itself indicate there is a conflict of laws problem. ( Hurtado, supra, 11 Cal.3d at p. 580, 114 Cal.Rptr. 106, 522 P.2d 666.) Indeed, if the relevant laws of each state are identical, there is no problem and the trial court may find California law applicable to class claims. (Ibid.; see Bernhard v. Harrah's Club, supra, 16 Cal.3d at p. 317, 128 Cal.Rptr. 215, 546 P.2d 719.) If, however, the trial court finds the laws are materially different, it must proceed to the second step and determine what interest, if any, each state has in having its own law applied to the case. ( Hurtado, supra, 11 Cal.3d at p. 580, 114 Cal.Rptr. 106, 522 P.2d 666.) Despite materially different laws, there is still no problem in choosing the applicable rule of law where only one of the states has an interest in having its law applied. (Ibid.; see Bernhard v. Harrah's Club, supra, 16 Cal.3d at p. 317, 128 Cal.Rptr. 215, 546 P.2d 719.) This means the trial court may properly find California law applicable without proceeding to the third step in the analysis if the foreign law proponent fails to identify any actual conflict or to establish the other state's interest in having its own law applied. (See Bernhard v. Harrah's Club, supra, 16 Cal.3d at pp. 317 318, 128 Cal.Rptr. 215, 546 P.2d 719; In re Title U.S.A. Ins. Corp. (1995) 36 Cal. App.4th 363, 372, 42 Cal.Rptr.2d 498.) Only if the trial court determines that the laws are materially different and that each state has an interest in having its own law applied, thus reflecting an actual conflict, must the court take the final step and select the law of the state whose interests would be more impaired if its law were not applied. ( Bernhard, v. Harrah's Club, supra, 16 Cal.3d at p. 320, 128 Cal.Rptr. 215, 546 P.2d 719; see also Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d at pp. 164-165, 148 Cal. Rptr. 867, 583 P.2d 721.) In making this comparative impairment analysis, the trial court must determine the relative commitment of the respective states to the laws involved and consider the history and current status of the states' laws and the function and purpose of those laws. ( Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d at p. 166, 148 Cal. Rptr. 867, 583 P.2d 721.) These rules apply whether the dispute arises out of contract or tort ( Application Group, Inc. v. Hunter Group, Inc., supra, 61 Cal. App.4th at p. 896, 72 Cal.Rptr.2d 73; cf. Bernkrant v. Fowler (1961) 55 Cal.2d 588, 594, 12 Cal.Rptr. 266, 360 P.2d 906), and a separate conflict of laws inquiry must be made with respect to each issue in the case ( Application Group, Inc. v. Hunter Group, Inc., supra, 61 Cal.App.4th at p. 896, 72 Cal.Rptr.2d 73; Beech Aircraft Corp. v. Superior Court (1976) 61 Cal.App.3d 501, 518, 132 Cal.Rptr. 541). Amici curiae in support of ASB argue that the burdens contemplated in Hurtado, supra, 11 Cal.3d 574, 114 Cal.Rptr. 106, 522 P.2d 666, should not apply when a nationwide class action is at issue. In their view, the law of the other states in which class members reside should presumably govern their claims unless the proponent of class certification affirmatively demonstrates that California law is more properly applied. To support this position, amici curiae point out that nationwide class actions may be, and often are, used to resolve the claims of nonresidents who lack the minimum contacts in the forum state normally needed to support personal jurisdiction. (See Phillips Petroleum Co. v. Shutts, supra, 472 U.S. at pp. 806-814, 105 S.Ct. 2965.) In such cases, they argue, California may not constitutionally weigh the scales in favor of applying its own law. We disagree. As amici curiae acknowledge, and as already noted above, a forum state may constitutionally apply its own law to the claims of nonresident class members if the state has a `significant contact or significant aggregation of contacts' to the claims asserted by each member of the plaintiff class, contacts `creating state interests,' in order to ensure that the choice of [the forum's] law is not arbitrary or unfair. ( Phillips Petroleum Co. v. Shutts, supra, 472 U.S. at pp. 821-822, 105 S.Ct. 2965.) Accordingly, so long as the requisite significant contacts to California exist, a showing that is properly borne by the class action proponent, California may constitutionally require the other side to shoulder the burden of demonstrating that foreign law, rather than California law, should apply to class claims. [8] In sum, in the absence of an effective choice-of-law agreement to the contrary, California law may be used on a classwide basis so long as its application is not arbitrary or unfair with respect to nonresident class members ( Phillips Petroleum Co. v. Shutts, supra, 472 U.S. at pp. 821-822, 105 S.Ct. 2965), and so long as the interests of other states are not found to outweigh California's interest in having its law applied ( Bernhard v. Harrah's Club, supra, 16 Cal.3d at p. 320, 128 Cal. Rptr. 215, 546 P.2d 719; Clothesrigger, supra, 191 Cal.App.3d at p. 614, 236 Cal. Rptr. 605).