Roy Karon and Peddler LLC v. Elliott Aviation, James Mitchell, Wynn Elliott, Elliott Aviation Aircraft Sales, Inc., and Elliott Jets ( 2020 )

IN THE SUPREME COURT OF IOWA
No. 18–1199
Filed January 10, 2020
ROY KARON and PEDDLER LLC,
Appellants,
vs.
ELLIOTT AVIATION, JAMES MITCHELL, WYNN ELLIOTT, ELLIOTT
AVIATION AIRCRAFT SALES, INC., and ELLIOTT JETS,
Appellees.
Appeal from the Iowa District Court for Polk County, David N. May,
Judge.
The plaintiffs appeal a district court order dismissing their claims
without prejudice based on a forum-selection clause. AFFIRMED.
Steven J. Crowley and Edward J. Prill of Crowley & Prill Law Firm,
Burlington, for appellants.
William W. Graham and Wesley T. Graham of Duncan Green, P.C.,
Des Moines, and Patrick J. Rooney and Tyler P. Brimmer of Fafinski Mark
& Johnson, P.A., Eden Prairie, Minnesota, for appellees.
2
MANSFIELD, Justice.
I. Introduction.
This case, involving an alleged scheme to inflate the purchase price
of a general aviation jet aircraft, presents the question of what must be
shown to avoid the effects of a contractual forum-selection clause. Is fraud
in general enough, or does the fraud have to relate specifically to the
clause? Joining the Restatement (Second) of Conflict of Laws, the United
States Supreme Court, and a number of our fellow state supreme courts,
we conclude that the fraud must relate to the clause itself. This is a logical
corollary to our prior holding that the fraud necessary to set aside an
agreement to arbitrate must relate to the arbitration clause itself. See
Dacres v. John Deere Ins., 548 N.W.2d 576, 578 (Iowa 1996).
In the present case, the plaintiffs contend that the defendants
cheated them, but they have not alleged fraud with respect to the forum-
selection clause in the written contract. Accordingly, we affirm the district
court’s order dismissing this action without prejudice and requiring any
future action to be brought in Kansas.
II. Facts and Procedural History.
Because we are reviewing the grant of a motion to dismiss, we take
as true the plaintiffs’ factual allegations. See Venckus v. City of Iowa City,
930 N.W.2d 792, 798 (Iowa 2019).
A. The Parties Involved. Roy Karon is an Iowa resident and the
sole member of Peddler, LLC, an Iowa limited liability company. Karon is
also the sole shareholder of BVS, Inc., a nonparty Iowa corporation based
in Cedar Rapids. Peddler leases an aircraft to BVS and Karon so their
personnel can travel the United States and Canada to provide training to
financial institutions.
3
Wynn Elliott is the president and a director of Elliott Aviation
Aircraft Sales, Inc., an Iowa corporation, and the president and a director
of Elliott Aviation, Inc., an Iowa corporation. At all relevant times, James
Mitchell was an aircraft sales manager at Elliott Aviation Aircraft Sales,
Inc. The parties have collectively referred to Wynn Elliott, James Mitchell,
Elliott Aviation Aircraft Sales, and Elliott Aviation as “the Elliott
Defendants.”
B. The Cessna Citation X Agreement. In April 2014, Karon was
looking to upgrade Peddler’s 1999 Cessna Citation Bravo jet aircraft to a
Cessna Citation X, a larger, faster jet. Karon wanted Peddler to sell the
Bravo and purchase a Citation X in a tax-free exchange pursuant to
§ 1031 of the Internal Revenue Code. See 26 U.S.C. § 1031 (2012). 1
Karon had been doing business with the Elliott Defendants for over
thirty years, and he decided to use their services in purchasing the
Citation X. Thus Karon proposed to Mitchell, who was acting on behalf of
the Elliott Defendants, that (1) Karon would search for and find a
Citation X suitable for Peddler’s needs, (2) Karon would negotiate a price
with the Citation X seller on the behalf of Peddler, (3) Karon would notify
the Elliott Defendants, and (4) the Elliott Defendants would act as the
broker to accomplish the § 1031 exchange. In the brokered transaction,
the Elliott Defendants would acquire the chosen Citation X from the seller
for Peddler, and then Peddler would trade in the Bravo to the Elliott
Defendants for an agreed-upon $1.8 million, pay the remaining cash
balance due, and immediately accept delivery of the Citation X. The Elliott
Defendants would be compensated through a transaction fee of $100,000
plus whatever profit they received on the lease or resale of the Bravo.
1If Peddler did not use a § 1031 exchange, it would presumably be liable for
income tax on recaptured depreciation when it sold the Bravo.
4
Mitchell, on the behalf of the Elliott Defendants, orally accepted Karon’s
proposal.
Although Karon was to be responsible for finding the Citation X,
both Mitchell and Karon researched the aircraft market and found a used
2000 Citation X that would suit Peddler’s needs. The Citation X was being
sold by Kansas-headquartered Cessna Aircraft Company, a company for
which Mitchell used to work. When Karon contacted Mitchell to inform
him that he would begin price negotiations with Cessna, Mitchell offered
to negotiate the price himself. Mitchell represented that he (Mitchell)
would be able to negotiate a lower price because of his prior relationship
with Cessna. Karon agreed.
Karon alleges that Mitchell informed him Cessna wanted $6 million
for the Citation X. Karon responded to Mitchell that he would pay no more
than $5.8 million. The negotiations continued.
Mitchell and Cessna arrived at a final acquisition price, which
Mitchell told Karon was $5.8 million. Karon accepted this price, and the
parties then negotiated additional details, including the installation of
winglets to increase the plane’s range and capacity, pilot training, and
subscriptions to certain service programs. A written purchase agreement
(Purchase Agreement) was drawn up between the parties based upon the
$5.8 million aircraft acquisition price. The brokerage fee, winglets, pilot
training, and service program subscriptions brought the total contract
value to approximately $6.7 million. Karon signed the Purchase
Agreement on behalf of Peddler on May 30, and Mitchell signed on behalf
of Elliott Aviation Aircraft Sales on June 2. Approximately three weeks
later, on June 26, the Citation X was transferred from Cessna to Elliott
Aviation Aircraft Sales and then immediately to Peddler. At that time,
Peddler paid the Elliott Defendants the $100,000 brokerage fee.
5
The Purchase Agreement contained the following paragraph: 2
9. CHOICE OF LAW AND JURISDICTION. [Elliott
Aviation Aircraft Sales] and [Peddler] agree this Agreement will
be deemed made and entered into and will be performed
wholly within the State of Kansas, and any dispute arising
under, out of, or related in any way to this Agreement, the
legal relationship between [Elliott Aviation Aircraft Sales] and
[Peddler], or the transaction that is the subject of this
Agreement will be governed and construed under the laws of
the State of Kansas, USA, exclusive of conflicts of laws. Any
dispute arising under, out of, or related in any way to this
Agreement, the legal relationship between [Elliott Aviation
Aircraft Sales] and [Peddler] or the transaction that is the
subject of this Agreement will be adjudicated solely and
exclusively in the United States District Court for the State of
Kansas, in Wichita, Kansas, or, if that court lacks jurisdiction,
Kansas state courts of the 18th Judicial District. Each of the
parties consents to the exclusive, personal jurisdiction of
these courts and, by signing this Agreement, waives any
objection to venue of the Kansas courts.
The Purchase Agreement also had a “severability and waiver” clause:
If any provision of this Agreement is or becomes null or
unenforceable by operation of law, the other provisions will
remain valid and enforceable. The waiver by either party of a
breach of any provision of this Agreement will not constitute
a waiver of any subsequent breach of the same or any other
provision nor will it be considered a waiver of the provision
itself.
Furthermore, the Purchase Agreement contained an integration
clause: “This Agreement constitutes the entire agreement between the
parties with respect to its subject matter and supersedes all prior written
or oral agreements, representations, negotiations, proposals or
discussions between the parties with respect to its subject matter.”
C. The Litigation. In February 2015, “an outside source”
informed Karon that the actual acquisition price for the Citation X was
2The plaintiffs’ petition referred to “written documents” that documented “the final
transaction,” although their petition did not attach those documents. Instead, the
defendants supplied the Purchase Agreement as an exhibit to their motion to dismiss.
The plaintiffs do not dispute that this exhibit is in fact the parties’ written Purchase
Agreement.
6
likely far less than $5.8 million. Accordingly, Karon contacted the Elliott
Defendants and requested documentation of the acquisition price. Peddler
and Karon allege they ultimately discovered “via a separate and
independent source” that the acquisition price was indeed misrepresented,
and they demanded reimbursement of the $400,000 difference between
$5.8 million and the actual $5.4 million acquisition price. The Elliott
Defendants refused. This litigation followed.
On February 26, Peddler filed suit against Elliott Aviation Aircraft
Sales in the Iowa District Court for Linn County. Fact discovery took place.
The defendant filed a motion for summary judgment which, on April 7,
2016, the district court denied. 3 A jury trial was scheduled for January 9,
2017. On December 29, 2016—eleven days prior to the scheduled
commencement of trial in Linn County—Peddler voluntarily dismissed its
petition without prejudice pursuant to Iowa Rule of Civil Procedure 1.943.
Over a year later, on February 23, 2018, Peddler, this time joining
with Karon, refiled its action in the Iowa District Court for Polk County
against all the Elliott Defendants. The petition alleged that the Elliott
Defendants had breached their oral brokerage contract with Peddler; the
Elliott Defendants had fraudulently misrepresented the acquisition price
of the Citation X and failed to disclose the true acquisition price; and
Mitchell, acting individually and as an agent of the Elliott Defendants, had
breached a fiduciary duty to Peddler by misrepresenting the acquisition
price.
The Elliott Defendants, in lieu of filing an answer, moved to dismiss
on three grounds. First, the Elliott Defendants maintained the claims were
barred by the applicable Kansas statutes of limitations. Second, the Elliott
3Thatmotion went to the merits of the litigation. Elliott Aviation Aircraft Sales did
not raise the forum-selection clause in the initial litigation.
7
Defendants asserted improper venue based on the forum-selection clause
in the Purchase Agreement. Third, the Elliott Defendants urged that the
petition failed to allege a cause of action against Wynn Elliott or Elliott
Aviation, Inc. Peddler and Karon resisted, and a hearing was held on
June 7.
On June 13, the district court issued an order dismissing the case
without prejudice based on improper venue:
Defendants ask this Court to enforce Paragraph 9.
Specifically, Defendants ask this Court to: (1.) dismiss with
prejudice because, inter alia, Plaintiffs’ claims are barred by
the applicable Kansas statutes of limitation; or, in the
alternative, (2.) dismiss without prejudice because Kansas,
not Iowa, is the parties’ chosen venue.
Plaintiffs respond that, because they have alleged that
the purchase agreement was “procured by fraud” and is “void
ab initio,” the Court cannot enforce Paragraph 9 of the
purchase agreement. Plaintiffs emphasize that, because the
purchase agreement is not “fully integrated,” their claims of
fraudulent inducement are not precluded.
Importantly, though, Plaintiffs’ fraud claims are about
the transaction as a whole, through which they were allegedly
“defrauded out of $400,000.” Plaintiffs make no claim that
Paragraph 9 was induced by fraud. Nor do Plaintiffs claim
that Paragraph 9 itself is otherwise invalid.
Thus, the problem before the Court is similar to one that
sometimes arises in the context of arbitration: If a contract
contains an arbitration clause, and if the plaintiff claims that
the entire contract was fraudulently induced, should the
arbitration clause be enforced?
In Prima Paint, the United States Supreme Court held
that if the plaintiff’s allegations of fraud are directed to the
total transaction, and not to the arbitration clause itself, then
the arbitration clause should be enforced. Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). Arbitrators,
not judges, should resolve allegations of fraud in the
transaction “as a whole.” See Madol v. Dan Nelson Auto. Grp.,
372 F.3d 997, 1000 (8th Cir. 2004) (applying Prima Paint).
Iowa has adopted the Prima Paint rule. [The court went
on to quote from Dacres, 548 N.W.2d at 578].
8
Of course, Paragraph 9 is not an arbitration clause.
Instead, it contains venue and choice of law provisions.
Courts have held, however, that the Prima Paint rule applies
with equal force to venue and choice of law provisions. See,
e.g., Stamm v. Barclays Bank of N.Y., 960 F. Supp. 724, 729
(S.D.N.Y. 1997) (citing Prima Paint and other authorities for
the proposition that a “claim of fraud in the inducement of a
contract is insufficient to invalidate a forum selection or
choice-of-law clause found in that contract”). As Magistrate
Judge Walters correctly observed, venue and choice of law
provisions “would be practically unenforceable if they could
be avoided simply by an allegation of fraud in the
inducement.” Morris v. McFarland Clinic P.C., No. CIV. 4:03-
CV-30439, 2004 WL 306110, at *2 (S.D. Iowa Jan. 29, 2004).
The Court concludes, therefore, that the Prima Paint
rule should be used to determine whether Paragraph 9 is
enforceable. See Dacres, 548 N.W.2d at 578. As already
explained, Plaintiffs’ claims of fraud are about the transaction
as a whole. Plaintiffs do not claim that Paragraph 9 itself was
fraudulently induced. Therefore, under the Prima Paint rule,
Paragraph 9 should be enforced.
Karon and Peddler filed a timely appeal, which we retained.
III. Standard of Review.
We review rulings on motions to dismiss for correction of errors at
law. Venckus, 930 N.W.2d at 798.
IV. Does the Prima Paint Rule Apply in Iowa to Forum-
Selection Clauses?
Under paragraph 9 of the Purchase Agreement, there is no dispute
that the plaintiffs’ claims “aris[e] under, out of, or [are] related . . . to” the
agreement between Elliott Aviation Aircraft Sales and Peddler or “the
transaction that is the subject of” that agreement. Therefore, taking
paragraph 9 at its terms, exclusive jurisdiction and venue for this case
should rest in the federal and state courts located in Wichita, Kansas. 4
The plaintiffs, however, argue that their allegation of fraud changes things.
4Theplaintiffs make no attempt to distinguish between parties that signed the
Purchase Agreement (i.e., Peddler and Elliott Aviation Aircraft Sales) and those that did
not.
9
The district court in this case applied the rule provided by the United
States Supreme Court for arbitration clauses in Prima Paint Corp. v. Flood
& Conklin Manufacturing Co., 388 U.S. 395, 87 S. Ct. 1801 (1967). Prima
Paint purchased the assets of Flood & Conklin’s paint business. Id. at
397, 87 S. Ct. at 1802. After Prima Paint failed to make the first payment
due under the agreement, Flood & Conklin served a notice to arbitrate. Id.
at 398, 87 S. Ct. at 1803. Prima Paint filed suit seeking rescission of the
entire agreement on the basis of fraud. Id. Flood & Conklin moved to stay
the court action pending arbitration, contending that whether there was
fraud in the inducement of the consulting agreement was a question for
the arbitrators. Id. at 399, 87 S. Ct. at 1803. The district court granted
Flood & Conklin’s motion, and the court of appeals affirmed. Id. at 399,
87 S. Ct. at 1803–04.
The Supreme Court also affirmed. Id. at 406–07, 87 S. Ct. at 1807.
It held that under the Federal Arbitration Act (FAA), a claim of fraud in the
inducement of the entire contract did not vitiate an arbitration clause
referring any controversy or claim arising out of or relating to the
agreement to arbitration:
Accordingly, if the claim is fraud in the inducement of
arbitration clause itself—an issue which goes to the “making”
of the agreement to arbitrate—the federal court may proceed
to adjudicate it. But the statutory language does not permit
the federal court to consider claims of fraud in the inducement
of the contract generally.
Id. at 403–04, 87 S. Ct. at 1806 (footnote omitted).
Our court followed the Prima Paint rule in Dacres, 548 N.W.2d 576.
Dacres brought an action against his employer to recover damages for
breach of contract and fraud. Id. at 577. The employer invoked an
arbitration clause in the parties’ contract. Id. Over Dacres’s opposition,
the district court ordered that the action for damages be stayed and that
10
the dispute be settled by arbitration. Id. The arbitration panel found
against Dacres. Id. at 577–78. On appeal, Dacres argued that the
arbitration clause should not have been enforced because (among other
things) it had been procured by fraud. Id. at 578. We held that because
Dacres’s allegations of fraud in the inducement went to the entire
agreement rather than specifically to the arbitration clause, it was
appropriate for the arbitration panel rather than the district court to
resolve the merits of the dispute:
[I]f a claim of fraud in the inducement is aimed at the entire
contract and that contract includes an agreement for
arbitration of disputes with respect thereto, the fraud claim is
properly to be determined by the arbitrators. Only if the fraud
in the inducement claim is specifically directed at the
arbitration clause itself is it subject to litigation in a court. . . .
Because Dacres’[s] allegations of fraud in the inducement go
to the entire agreement, they were properly determined by the
arbitrators.
Id. (citation omitted).
The question then is whether Prima Paint applies to a forum-
selection clause. In Scherk v. Alberto-Culver Co., the Supreme Court held
that it did as a matter of federal law. 417 U.S. 506, 519–20, 94 S. Ct.
2449, 2457 (1974). Scherk, a German citizen, sold his trademarks and
interest in a European toiletries business to Alberto-Culver, a Delaware
corporation with its principal place of business in Illinois. Id. at 508, 94
S. Ct. at 2451–52. The contract called for the arbitration of disputes in
France with the application of Illinois law. Id. at 508, 94 S. Ct. at 2452.
After differences between the parties arose, Alberto-Culver filed suit in the
United States District Court for the Northern District of Illinois, and
Scherk moved to dismiss for lack of jurisdiction based on the forum-
selection clause. Id. at 509, 94 S. Ct. at 2452. The district court denied
11
the motion, and the court of appeals affirmed the denial. Id. at 510, 94
S. Ct. at 2452–53.
The Supreme Court reversed, concluding that the forum-selection
clause should control. Id. at 519–21, 94 S. Ct. at 2457–58. The Court
noted, “An agreement to arbitrate before a specified tribunal is, in effect, a
specialized kind of forum-selection clause that posits not only the situs of
suit but also the procedure to be used in resolving the dispute.” Id. at 519,
94 S. Ct. at 2457.
The Court further noted,
In The Bremen we noted that forum-selection clauses
“should be given full effect” when “a freely negotiated private
international agreement [is] unaffected by fraud . . . .” 407
U.S., at 13, 12, 92 S. Ct., at 1915, 1914. This qualification
does not mean that any time a dispute arising out of a
transaction is based upon an allegation of fraud, as in this
cause, the clause is unenforceable. Rather it means that an
arbitration or forum-selection clause in a contract is not
enforceable if the inclusion of that clause in the contract was
the product of fraud or coercion. Cf. Prima Paint Corp., 388
U.S. 395, 87 S. Ct. 1801.
Id. at 519 n.14, 94 S. Ct. at 2457 n.14 (emphasis added); see M/S Bremen
v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S. Ct. 1907, 1916 (1972) (“The
correct approach would have been to enforce the forum clause specifically
unless Zapata could clearly show that enforcement would be unreasonable
or unjust, or that the clause was invalid for such reasons as fraud or
overreaching.” (Emphasis added.)).
Scherk and M/S Bremen were decided under federal law. Unlike in
the arbitration context, where the FAA applies, there is no federal
legislation that governs state court proceedings when a forum-selection
clause is at issue. Cf. Stewart Org., Inc., 487 U.S. at 28–29, 108 S. Ct. at
2243 (holding that 28 U.S.C. § 1404(a) governs the enforceability of a
forum-selection clause in a diversity case in federal court). Accordingly,
12
enforcement of a forum-selection clause in state court is a matter of state
law. See Perkins v. CCH Computax, Inc., 415 S.E.2d 755, 757 (N.C. Ct.
App. 1992) (declining to apply federal law), rev’d, 423 S.E.2d 780, 781
(N.C. 1992), superseded in part by statute, 1993 N.C. Sess. Laws ch. 436
Nonetheless, a number of state appellate courts have followed the
United States Supreme Court’s lead in ruling that forum-selection clauses
are enforceable unless the fraud goes specifically to the clause. See, e.g.,
Ex parte PT Sols. Holdings, LLC, 225 So. 3d 37, 45 (Ala. 2016) (“White has
never contended that the forum-selection clause itself is invalid as the
result of fraud, undue influence, or overweening bargaining power.
Instead, she challenged the validity of the contract as a whole based on
when she executed it. White is certainly entitled to argue that the contract
never became effective, but the argument must be raised in the forum
dictated by the forum-selection clause because the possible invalidity of
the contract as a whole does not negate enforcement of the forum-selection
clause.”); Bennett v. Appaloosa Horse Club, 35 P.3d 426, 431–32 (Ariz. Ct.
App. 2001) (holding that the forum-selection clause requiring litigation in
Idaho applied to the plaintiff’s fraud and consumer fraud claims); Provence
v. Nat’l Carriers, Inc., 360 S.W.3d 725, 730 (Ark. 2010) (“[W]e hold that in
Arkansas a party like the appellants in the instant case must plead fraud
in the inducement of the forum-selection clause itself to avoid its
application. Generalized allegations of fraud with respect to the
inducement of the contract as a whole, as the appellants have made in the
instant case, will not operate to invalidate a forum-selection clause.”); Edge
Telecom, Inc. v. Sterling Bank, 143 P.3d 1155, 1162 (Colo. App. 2006) (“We
agree with the rationale . . . and similarly hold that so long as a forum
selection clause is itself not the result of fraud, the parties can fairly expect
to litigate any issues, including the plaintiff’s general allegations of fraud,
13
in the designated forum.”); Nat’l Indus. Grp. (Holding) v. Carlyle Inv. Mgmt.
L.L.C., 67 A.3d 373, 380 (Del. 2013) (“[A] party cannot make ‘an end-run
around an otherwise enforceable [f]orum [s]election [p]rovision through an
argument about the enforceability of other terms in the contract’ . . . .”
(alterations in original) (quoting Ashall Homes Ltd. v. ROK Entm’t Grp., Inc.,
992 A.2d 1239, 1248 (Del. Ch. 2010))); Golden Palm Hosp., Inc. v. Stearns
Bank Nat’l Ass’n, 874 So. 2d 1231, 1235 (Fla. Dist. Ct. App. 2004) (“When
it claims that a forum selection clause is invalid based on fraud, the party
must show that the clause itself is the product of the fraud or that the
fraud caused the inclusion of the clause in the agreement.”); Brandt v.
MillerCoors, LLC, 993 N.E.2d 116, 122 (Ill. App. Ct. 2013) (“[I]n order to
invalidate the clause on the ground of fraud and overreaching, the fraud
alleged must be specific to the forum selection clause itself.” (quoting IFC
Credit Corp. v. Rieker Shoe Corp., 881 N.E.2d 382, 395 (Ill. App. Ct. 2007)));
Vanier v. Ponsoldt, 833 P.2d 949, 952 (Kan. 1992) (“Parties to a contract
may choose the jurisdiction in which all actions or proceedings arising
from their transaction shall be heard. The forum selected by the parties
must bear a reasonable relationship to the transaction and the forum-
selection clause in the contract must not have been entered into under
fraud or duress.” (syllabus by the court)); Vallejo Enter., L.L.C. v. Boulder
Image, Inc., 950 So. 2d 832, 835 (La. Ct. App. 2006) (“For the forum-
selection clause to be unenforceable on the grounds of fraud or
overreaching, it must be shown that the inclusion of the clause in the
contract was the product of fraud or coercion.”); Karty v. Mid–Am. Energy,
Inc., 903 N.E.2d 1131, 1135 (Mass. App. Ct. 2009) (“[B]ecause the
allegations set out in Karty’s complaint and amended complaint speak only
to fraud in the inducement as to the entire subscription agreement and
fail to allege or set out any facts concerning the specific question whether
14
the forum-selection clause was obtained by fraud, we see no error in the
dismissal of his complaint.”); Paradise Enters. Ltd. v. Sapir, 811 A.2d 516,
521 (N.J. Super. Ct. App. Div. 2002) (“[G]enerally [forum-selection clauses]
are ‘prima facie valid and enforceable in New Jersey[,]’ and . . . ‘New Jersey
courts will decline to enforce a clause only if it fits into one of three
exceptions to the general rule: (1) the clause is a result of fraud or
“overweening” bargaining power; (2) enforcement would violate the strong
public policy of New Jersey; or (3) enforcement would seriously
inconvenience trial.’ . . . Bremen ‘represents the prevailing view on the
enforceability of forum-selection clauses, and has been applied by federal
and state courts confronted by jurisdictional choices involving forum-
selection clauses.’ General acceptance of the validity of forum selection
agreements principles is corroborated by the Restatement (Second) of
Conflict of Laws . . . .” (first quoting Caspi v. Microsoft Network, L.L.C., 732
A.2d 528, 530 (N.J. Super. Ct. App. Div. 1999); and then quoting Kubis v.
Perszyk Assocs., Inc. v. Sun Microsystems, Inc., 680 A.2d 618, 624
(N.J. 1996))); Original Pizza Pan v. CWC Sports Grp., Inc., 954 N.E.2d 1220,
1223 (Ohio Ct. App. 2011) (“It is settled law that unless there is a showing
that the alleged fraud or misrepresentation induced the party opposing a
forum selection clause to agree to inclusion of that clause in the contract,
a general claim of fraud or misrepresentation as to the entire contract does
not affect the validity of the forum selection clause. Thus even if plaintiffs
were induced to enter into the agreement by fraud, deceit and
misrepresentation, this would not affect the validity of the forum selection
clause.” (Citation omitted.) (quoting Four Seasons Enters. v. Tommel Fin.
Servs., Inc., No. 77248, 2000 WL 1679456, at *2 (Ohio Ct. App. Nov. 9,
2000)); Patriot Commercial Leasing Co. v. Kremer Rest. Enters., LLC, 915
A.2d 647, 653 (Pa. Super. Ct. 2006) (“A forum selection clause can be
15
avoided for fraud only when the fraud relates to procurement of the forum
selection clause itself, standing independently from the remainder of the
agreement.”); In re Lyon Fin. Servs., Inc., 257 S.W.3d 228, 232 (Tex. 2008)
(“We have held that fraudulent inducement to sign an agreement
containing a dispute resolution agreement such as an arbitration clause
or forum-selection clause will not bar enforcement of the clause unless the
specific clause was the product of fraud or coercion.”); Paul Bus. Sys., Inc.
v. Canon U.S.A., Inc., 397 S.E.2d 804, 807 (Va. 1990) (“According to the
modern view, which we now embrace, contractual provisions limiting the
place or court where potential actions between the parties may be brought
are prima facie valid and should be enforced, unless the party challenging
enforcement establishes that such provisions are unfair or unreasonable,
or are affected by fraud or unequal bargaining power.”); Caperton v. A.T.
Massey Coal Co., 690 S.E.2d 322, 348 (W. Va. 2009) (adopting the federal
approach and stating that the party challenging the contractually chosen
forum must show “that the clause was invalid for such reasons as fraud
or overreaching”); Durdahl v. Nat’l Safety Assocs., Inc., 988 P.2d 525, 528
(Wyo. 1999) (“We adopt the modern approach and hold forum selection
clauses are prima facie valid and will be enforced absent a demonstration
by the party opposing enforcement that the clause is unreasonable or
based upon fraud or unequal bargaining positions.”).
A handful of state courts, such as the Utah Supreme Court, take a
minority approach that allows a plaintiff’s claim that the contract as a
whole was entered into fraudulently to potentially render the forum-
selection clause unenforceable. See, e.g., Energy Claims Ltd. v. Catalyst
Inv. Grp. Ltd., 325 P.3d 70, 83 (Utah 2014). In Energy Claims, the Utah
Supreme Court reasoned,
16
The major flaw with the majority approach is that the district
court must accept as valid a provision in a contract despite
the plaintiff’s contention that the entire contract was induced
by fraud. We also find it problematic that the majority
approach imposes upon the plaintiff the burden of making a
“separate and distinct challenge” to the forum selection clause
itself, when the only support the plaintiff has—the allegation
that the entire contract and all of the provisions contained
therein are fraudulent—is deemed to be necessarily
inadequate. The application of this approach may also result
in defrauded plaintiffs being forced to litigate a contract that
is ultimately deemed fraudulent in a different forum as the
result of a provision they never bargained for.
We recognize, however, that the majority approach does
have the effect of avoiding the task of determining whether a
contract is valid at the motion to dismiss stage. Instead, it
reserves that issue until further discovery can be done, at
which point that issue can be adjudicated on its merits with
the benefit of full discovery. This notwithstanding, we
conclude that the minority approach is more consistent with
our case law and with the standard of review employed at the
motion to dismiss stage. We are also not persuaded that the
minority approach will allow plaintiffs to freely dodge forum
selection clauses, since (a) they are required to plead fraud
with particularity, and (b) the district court has the discretion
to order an evidentiary hearing, both of which will assure that
valid forum selection clauses are not rejected based on the
pleadings alone.
Id. at 85–86 (footnote omitted). In the court’s view, this minority approach
“protects defrauded plaintiffs from being forced to litigate fraudulent
contracts in a potentially inconvenient forum not of their choosing.” Id. at
85. This Utah precedent has not been followed by the courts of any other
state since its issuance.
Notably, the effect of the forum-selection clause in Energy Claims
would have been to move the litigation to England, not to a nearby state
as here. See id. at 75, 80. Also, the Utah court emphasized that Utah
Rule of Civil Procedure 9(b) requires fraud to be pled with particularity.
Id. at 86. Thus, in Utah, a plaintiff is “required to plead with particularity
the circumstances leading to the fraudulent inducement of the contract.”
Id. The court noted,
17
This rule provides protection against the possibility that
plaintiffs could avoid forum selection clauses by artfully
pleading around them, as the trial judge can review the
complaint to ensure that the details provided by the plaintiff
truly constitute fraudulent inducement of the contract.
Id. No comparable provision exists in Iowa; our rules contain no
counterpart to Federal Rule of Civil Procedure 9(b) and thus do not
expressly require fraud to be pled with particularity. See Rosenberg v.
Miss. Valley Constr. Co., 252 Iowa 483, 485, 106 N.W.2d 78, 79 (1960) (“[I]t
is not necessary that all details and circumstances of the transaction be
set forth with particularity [with allegations of fraud]; it is sufficient if the
allegation of fraud is explicitly and distinctly made and the mode in which
the fraud was accomplished is pointed out.”); see also Iowa R. Civ.
P. 1.402(2)(a) (“Each averment of a pleading shall be simple, concise, and
direct. No technical forms of pleadings are required.”).
The Utah court cited three other state jurisdictions for following the
minority approach: Georgia, New York, and Tennessee. Energy Claims,
325 P.3d at 85 & n.82; see SRH, Inc. v. IFC Credit Corp., 619 S.E.2d 744,
746 (Ga. Ct. App. 2005); DeSola Grp., Inc. v. Coors Brewing Co., 605
N.Y.S.2d 83, 83–84 (App. Div. 1993); Lamb v. Megaflight, Inc., 26 S.W.3d
627, 631 (Tenn. Ct. App. 2000). 5 It also suggested that Missouri might be
leaning toward adopting the minority approach. Energy Claims, 325 P.3d
at 85 n.81; see Burke v. Goodman, 114 S.W.3d 276, 280 (Mo. Ct. App.
2003) (analyzing enforcement of a forum-selection clause by first
determining whether or not the contract was adhesive, stating that “the
forum selection clause must have been obtained through freely negotiated
agreements absent fraud and overreaching”).
5See also Johnson v. Key Equip. Fin., 627 S.E.2d 740, 742 (S.C. 2006) (holding
that a forum-selection clause opting for New York courts did not prevent the plaintiffs
from suing in South Carolina over misrepresentations that predated the parties’
agreement).
18
We question the Utah Supreme Court’s inclusion of New York. A
widely available treatise on New York law states, “To invalidate a forum
selection clause on [fraud or overreaching], however, the allegation of fraud
or overreaching must go, not to the contract as a whole, but to the clause
itself.” 2 Robert I. Steiner, New York Practice Series: Commercial Litigation
in New York State Courts § 13:15 (Robert L. Haig ed., 4th ed.), Westlaw
(database updated Sept. 2019) (citing Hunt v. Landers, 766 N.Y.S.2d 384,
385 (App. Div. 2003); Hirschman v. Nat’l Textbook Co., 584 N.Y.S.2d 199,
200 (App. Div. 1992); British W. Indies Guar. Tr. Co. v. Banque
Internationale a Luxembourg, 567 N.Y.S.2d 731, 732 (App. Div. 1991)); see
also Wang v. UBS AG, 29 N.Y.S.3d 185, 185 (App. Div. 2016) (“The forum
selection clause applies to the fraud claims, as they arise out of and in
connection with the parties’ account agreement . . . .”); Patricia
Youngblood Reyhan, Choice of What? The New York Court of Appeals
Defines the Parameters of Choice-of-Law Clauses in Multijurisdictional
Cases, 82 Alb. L. Rev. 1241, 1254–55 (2019) (“New York courts presume
their validity, overcoming that presumption only in cases where general
contract principles, such as fraud, duress, overreaching or
unconscionability, or damage to a fundamental public policy would
undermine the clause. Even as to these grounds, they must go to the
forum selection clause itself and not to the contract as a whole.” (Footnote
omitted.)).
Furthermore, the Utah court’s supposition that Missouri might have
been leaning toward the minority approach has not come to fruition.
In 2014, the Missouri Court of Appeals considered Arkansas and then
Missouri law in succession, finding that both led to the same outcome.
Like Missouri, Arkansas enforces forum-selection clauses unless it is
shown that to do so “would be unreasonable and unfair.” Provence, 360
19
S.W.3d at 729. The Arkansas Supreme Court in Provence considered, as
in this case, “the validity of forum-selection clauses where fraud is
generally pled as inducing the agreements.” Id. The Missouri Court in
Raydiant Technology, LLC v. Fly-N-Hog Media Group, Inc. followed the lead
of Arkansas, stating,
Raydiant claims fraud in the inducement of the contract as a
whole, not solely as to its forum selection clause, which is
insufficient per Provence. Because Raydiant does not
otherwise show unfairness or unreasonableness, we find no
basis to reverse under Arkansas law.
Missouri law yields the same result. Raydiant’s
contention that these contract provisions do not reach a tort
claim of fraud either overlooks or misreads our opinion in
Major [v. McCallister, 302 S.W.3d 227 (Mo. Ct. App. 2009)].
There, a plaintiff alleged nonperformance of written
representations, but couched her claims in tort terms (fraud,
misrepresentation, etc.). We indicated that the essential issue
is not one of tort vs. contract, but of contract interpretation—
does the forum selection clause apply to or reach the subject
claims? See 302 S.W.3d at 232.
Here, as in Major, it does. Raydiant’s claims arise out
of or are related to the contract, so they are within its forum
selection clause. Raydiant does not otherwise show
unfairness or unreasonableness, as already noted, so we
would enforce the forum selection clause under Missouri law
as well.
439 S.W.3d 238, 240–41 (Mo. Ct. App. 2014) (footnote omitted).
The Restatement (Second) of Conflict of Laws is consistent with the
majority approach. It provides, “The parties’ agreement as to the place of
the action will be given effect unless it is unfair or unreasonable.”
Restatement (Second) Conflict of Laws § 80, at 85 (Am. Law Inst. 1988
rev.). A comment explains,
[T]here is good reason why a court should refrain from
exercising the jurisdiction it admittedly has in order to give
effect to a provision in a contract that any action thereon shall
be brought only in some other state. Such a provision
represents an attempt by the parties to insure that the action
will be brought in a forum that is convenient to them. It is
20
also a provision to which the parties have bound themselves
by contract and from which a court will be reluctant to permit
one of the parties to escape without the consent of the other.
Id. cmt. a, at 85. Another comment adds, “A court will entertain an action
brought in violation of a choice-of-forum provision if it finds that the
provision was obtained by fraud, duress, the abuse of economic power or
other unconscionable means.” Id. cmt. c, at 85. (emphasis added).
In 1982, we applied an earlier version of section 80 and held,
[C]lauses purporting to deprive Iowa courts of jurisdiction
they would otherwise have are not legally binding in Iowa. We
further hold, however, that under a motion to dismiss an Iowa
action without prejudice on the ground of forum
nonconveniens, such a clause, if otherwise fair, will be given
consideration along with the other factors presented, in
determining whether the Iowa court should decline to
entertain the suit.
Davenport Mach. & Foundry Co. v. Adolph Coors Co., 314 N.W.2d 432, 437
(Iowa 1982). At that time, section 80 read, “The parties’ agreement as to
the place of the action cannot oust a state of judicial jurisdiction, but such
an agreement will be given effect unless it is unfair or unreasonable.”
Restatement (Second) of Conflict of Laws § 80, at 244 (Am. Law Inst. 1971).
We then reiterated the Davenport Machinery holding in Holiday Inns
Franchising, Inc. v. Branstad, 537 N.W.2d 724, 730 (Iowa 1995), and EFCO
Corp. v. Norman Highway Constructors, Inc., 606 N.W.2d 297, 299 (Iowa
2000).
But the Restatement has evolved since Davenport Machinery, and
we think our rule should as well. See Liberty Bank, F.S.B. v. Best Litho,
Inc., 737 N.W.2d 312, 315 (Iowa Ct. App. 2007) (“A forum selection clause
‘should control absent a strong showing that it should be set aside.’ ”
(quoting M/S Bremen, 407 U.S. at 15, 92 S. Ct. at 1916)). As newer
iterations of the Restatement emerge, our court has considered them and,
as appropriate, adopted their provisions. See, e.g., Thompson v. Kaczinski,
21
774 N.W.2d 829, 839 (Iowa 2009). For example, in Thompson, our court
became one of the first to adopt the scope-of-the-risk standard in the
Restatement (Third) of Torts: Liability for Physical Harm. Id.
The 1988 version of section 80 does not alter the previous blackletter
rule. See Restatement (Second) of Conflict of Laws § 80 reporter’s note, at
87 (Am. Law Inst. 1988 rev.). Clearly, a private agreement cannot take
away jurisdiction that an Iowa court would otherwise have. Id. But the
1988 version highlights that in exercising that jurisdiction, the Iowa court
should ordinarily examine the forum-selection clause first and give it effect
“unless it is unfair or unreasonable.” Id. § 80, at 85.
This approach makes sound policy sense when, as here, a
multimillion-dollar commercial transaction is involved. Both parties, it is
conceded, were represented in connection with the Purchase Agreement.6
If a forum-selection clause could be challenged simply based on fraud in
an overall transaction, then the advantages of predictability and efficiency
would be lost. Predictability would be lost because the parties would not
be able to know the locus of litigation in advance (and perhaps retain
counsel accordingly). Efficiency would be lost because it would be
necessary to litigate the merits in order to determine the locus of litigation.
In this case, plaintiffs acknowledge that it would be necessary to litigate
their entire fraud claim in Iowa in order to determine whether the litigation
should then proceed in Kansas. 7
6In resisting the motion to dismiss below, plaintiffs submitted documentation
indicating that they were represented by counsel in connection with the Purchase
Agreement.
7Under the majority approach that we approve of today, it is certainly possible for
a forum-selection clause not to be enforced. One illustration is Petersen v. Boeing Co.,
where the facts were as follows:
[Peterson’s] sworn affidavit states that the initial employment contract he
signed in the United States made no mention of a Saudi forum selection
clause, but that he was required to sign a new employment contract
22
Accordingly, we agree with the district court that the plaintiffs’
general allegations of fraud in the inducement are insufficient to avoid
enforcement of paragraph 9 of the Purchase Agreement. 8
V. Do Plaintiffs’ Other Grounds for Avoiding the Forum-
Selection Clause Have Merit?
A. The Assertion that Iowa Has a Larger Stake Than
Kansas. The plaintiffs urge that Iowa has a far greater stake in this
controversy because both they and the defendants are based in Iowa—the
plaintiffs in Cedar Rapids and the defendants in Des Moines. The alleged
fraud was perpetrated through communications that took place in Iowa.
Yet Kansas is not without ties to the controversy. The subject-
matter of the contract—i.e., the Citation X—was located in Kansas.
Peddler took delivery of the aircraft in Kansas and the parties agreed to
containing such a clause upon his arrival in Saudi Arabia. His new
supervisor, however, did not permit him time to read the agreement and
told him that failure to sign it would result in his being forced to return
immediately to the United States at his own expense.
715 F.3d 276, 282–83 (9th Cir. 2013) (holding that the district court should have “at the
very least” held an evidentiary hearing).
8Notably, in those circumstances where the legislature believes forum-selection
clauses should not be given effect, it has expressly said so. See Iowa Code § 322A.19(1)
(2015) (motor vehicle dealer franchises); id. § 523H.3(1) (other franchises); id.
§ 537A.10(3)(a) (franchise agreements); id. § 633D.8(7) (claims against a beneficiary of a
transfer on death security registration).
The legislature has also provided that tort claims should not be subject to
arbitration “[u]nless otherwise provided in a separate writing executed by all parties to
the contract.” Id. § 679A.1(2)(c). The FAA, however, does not recognize this limitation,
and the FAA preempts contrary state law with respect to any “contract evidencing a
transaction involving commerce.” See Heaberlin Farms, Inc. v. IGF Ins., 641 N.W.2d 816,
819 (Iowa 2002) (quoting Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272–75,
115 S. Ct. 834, 839–40 (1995)). It is important to note, however, that the legislature has
not adopted legislation similar to Iowa Code section 679A.1(2)(c) regarding forum-
selection clauses. The considerations are different because a forum-selection clause
requiring litigation in another state does not deprive the plaintiff of a jury trial or any
other trial right, whereas an arbitration clause does. See Bryant v. Am. Express Fin.
Advisors, Inc., 595 N.W.2d 482, 484 (Iowa 1999) (“[A] jury trial is obviously not a part of
arbitration.”).
23
Kansas law. Under section 80 of the Restatement, it is not enough that a
balance of convenience favors Iowa. Restatement (Second) of Conflict of
Laws § 80 cmt. c, at 86. Rather, this must be “the rare situation where
the chosen state would be a seriously inconvenient place for the trial and
that trial in the state of the forum would be far more convenient.” Id.
Moreover,
[a] significant factor in this regard is whether the chosen state
is also declared in the contract to be the state of the governing
law. This might be thought to suggest that the parties would
have wished to have the action brought in the chosen state
even in the case of substantial inconvenience.
Id.
B. The Assertion that the Oral Agreement Controls and that the
Purchase Agreement Should Not Be Considered as Part of the
Record. Next, the plaintiffs argue that they are relying on a preceding oral
agreement, not the parties’ later written Purchase Agreement. However,
the written Purchase Agreement is properly considered part of the record.
It was filed as an exhibit to the motion to dismiss. The parties do not
dispute its authenticity; they debate only its legal significance. When
dismissal is sought for improper venue, the court may consider a written
contract that is the basis for the improper venue claim. See EFCO Corp.,
606 N.W.2d at 300 (indicating that a motion to dismiss based on a choice-
of-forum clause may present issues of fact for the district court to resolve);
see also King v. State, 818 N.W.2d 1, 6 n.1 (Iowa 2012) (holding that even
in ruling on a motion to dismiss for failure to state a claim, the court may
consider documents referenced in the petition regardless of whether they
have been attached). This does not transform the matter into a full-fledged
summary judgment proceeding. The Purchase Agreement has an
integration clause, indicating that it “supersedes all prior written or oral
24
agreements, representations, negotiations, proposals or discussions
between the parties with respect to its subject matter.”
C. The Assertion that Plaintiffs Will Be Deprived of a Remedy if
Forced to Litigate in Kansas. The plaintiffs contend that forcing them to
litigate in Kansas will subject them to a two-year or three-year Kansas
statute of limitations and thus deprive them of a day in court. See Kan.
Stat. Ann. §§ 60-512, 60-513(a)(3) (West, Westlaw current through 2019
Reg. Sess., July 1, 2019). We make no determination on these matters.
But three points should be noted.
First, the parties agreed that Kansas law governed this transaction,
in addition to agreeing to a Kansas forum. We have previously declined to
apply Iowa’s more generous statute of limitations when an action would
be time-barred under the statute of limitations of the state whose
substantive law is applied. Harris v. Clinton Corn Processing Co., 360
N.W.2d 812, 816 (Iowa 1985). So it is not clear that keeping this case in
Iowa would salvage the plaintiffs’ claims. If Kansas substantive law
applied, plaintiffs’ claims would be subject to the Kansas statute of
limitations even if they were litigated in Iowa.
Second, we acknowledge that the Restatement states, “[E]ffect might
be denied a choice-of-forum provision calling for suit in a state where the
period of the statute of limitations applicable to the particular claim was
unusually short and had already expired.” Restatement (Second) of
Conflict of Laws § 80 cmt. c, at 86. But we do not consider two or three
years to be “unusually short.” For example, Georgia, Oregon,
Pennsylvania, and Virginia also have a two-year statute of limitations for
fraud. See Ga. Code Ann. § 9-3-33 (West, Westlaw through 2019 Reg.
Sess.); Or. Rev. Stat. Ann. § 12.110 (West, Westlaw through 2018 Reg.
Sess. & Spec. Sess.); 42 Pa. Stat. and Cons. Stat. Ann. § 5524(7) (West,
25
Westlaw through 2019 Reg. Sess. Act 87); Va. Code Ann. § 8.01-243 (West,
Westlaw through 2019 Reg. Sess.).
Third, it is worth noting that the alleged fraud was discovered in
February 2015, and Peddler filed its first lawsuit in February 2015. That
lawsuit was timely under any conceivable statute of limitations. However,
in December 2016, Peddler voluntarily dismissed it without prejudice, and
the plaintiffs waited until February 2018 to file a new action. If a
limitations problem has arisen, it may well be due to Peddler’s voluntary
dismissal of the prior lawsuit.
VI. Conclusion.
For the foregoing reasons, we affirm the district court’s dismissal of
this action based on the forum-selection clause.
AFFIRMED.
All justices concur except Appel, J., who dissents.
26
#18–1199, Karon v. Elliott Aviation
APPEL, Justice (dissenting).
I respectfully dissent. For the reasons expressed below, I do not find
the United States Supreme Court case of Prima Paint Corp. v. Flood &
Conklin Manufacturing Co., 388 U.S. 395, 87 S. Ct. 1801 (1967), or its
copycat case in Iowa, Dacres v. John Deere Insurance Co., 548 N.W.2d 576
(Iowa 1996), to be useful or instructive on the precise question before us.
While Prima Paint, and presumable Dacres, were based upon a
strong federal substantive policy in favor of arbitration under the Federal
Arbitration Act (FAA), there is no statutory public policy on forum selection
in Iowa. Our caselaw, however, refuses to enforce them based on public
policy grounds. See Davenport Mach. & Foundry Co. v. Adolph Coors Co.,
314 N.W.2d 432, 437 (Iowa 1982) (“After consideration of Field [v. Eastern
Building & Loan Ass’n, 117 Iowa 185, 90 N.W. 717 (1902)] and the other
authorities, we hold that clauses purporting to deprive Iowa courts of
jurisdiction they would otherwise have are not legally binding in Iowa.”).
There is therefore no basis in Iowa law for departing from the traditional
rule that when fraud in the inducement is alleged, a plaintiff may bring an
action in an Iowa court with personal and subject matter jurisdiction
seeking to rescind the entire contract notwithstanding a forum-selection
provision in the contract which the plaintiff seeks to rescind.
I. Traditional Fraud-in-the-Inducement Doctrine.
A. Fraud in the Inducement as a Tort Action with a Remedy of
Rescission. Fraud in the inducement gives rise to a tort claim for
damages. Hyler v. Garner, 548 N.W.2d 864, 870 (Iowa 1996) (“Fraudulent
inducement also gives rise to a tort claim for damages.”). A plaintiff
alleging fraud in the inducement may seek rescission of the subsequent
contract. Id. at 871. When rescission rather than damages is sought,
27
relief may be obtained without proof of scienter or pecuniary damage. Id.;
see also First Nat’l Bank in Lenox v. Brown, 181 N.W.2d 178, 182 (Iowa
1970).
Parol evidence is admissible to prove fraud in the inducement.
Scheel v. Super. Mfg. Co., 249 Iowa 873, 880, 89 N.W.2d 377, 382 (1958)
(“Parol evidence is admissible to prove fraud that induced the writing.”).
Further, a plaintiff can reach individuals as defendants who participated
in fraud in the inducement who could not be reached under a contract
theory. First Fin. USA, Inc. v. Steinger, 760 So. 2d 996, 997–98 (Fla. Dist.
Ct. App. 2000).
Punitive damages are generally available for aggravated cases of
fraud in the inducement. See, e.g., Conn. Gen. Life Ins. v. Jones, 764
So. 2d 677, 682 (Fla. Dist. Ct. App. 2000); Wiley v. Adkins, 48 S.W.3d 20,
23 (Ky. 2001); Mills v. Koscot Interplanetary Inc., 187 S.E.2d 372, 376 (N.C.
Ct. App. 1972). The same rationale extends under Iowa law. Ryan v.
Arneson, 422 N.W.2d 491, 496 (Iowa 1988) (“Punitive damages, on the
other hand, are not compensatory. They exist to punish the defendant
and to deter the offending party and like-minded individuals from
committing similar acts.” (Citation omitted.)).
B. The Remedy of Rescission Ordinarily Invalidates the Entire
Contract. “Ordinarily, rescission must be of the whole contract, though
there may be partial rescission in case of severable provisions.” Butler Mfg.
Co. v. Elliott & Cox, 211 Iowa 1068, 1071, 233 N.W. 669, 670 (1930).
“Whether a contract is entire or severable depends upon the intention of
the parties, manifested by their acts and by the circumstances of each
particular case.” Inman Mfg. Co. v. Am. Cereal Co., 124 Iowa 737, 741,
100 N.W. 860, 861 (1904). For example, “[i]f several articles are bought
for a separate price with a warranty applicable to each article, and the
28
warranty as to one or more articles is broken, it is said that rescission may
be had for such articles as do not comply with the warranty.” 26
Richard A. Lord, Williston on Contracts: A Treatise on the Law of Contracts
§ 68:17, at 213 (4th ed. 2019). There has been no rule of law dictating
that certain types of provisions are categorically “severable.”
II. FAA Ousts Traditional State Court Jurisdiction of Fraud-in-
the-Inducement Claims Based Solely on Federal Arbitration Policy.
A. Prima Paint: FAA as a Sleeping Giant with a Very Large
Federal Statutory Club. Although the traditional common law rule is that
a contract formed based upon fraud in the inducement is subject to
complete rescission, the United States Supreme Court held that federal
law overrode traditional state common law in Prima Paint Corp., 388 U.S.
395, 87 S. Ct. 1801.
The FAA was originally enacted in 1925. See United States
Arbitration Act, Pub. L. No. 68-401, 43 Stat. 883–86 (1925) (codified as
amended as Federal Arbitration Act, 9 U.S.C. §§ 1–4). For the first forty
years, there was little controversy under the FAA. In Prima Paint, however,
the Supreme Court considered a case where a contract containing an
arbitration clause was attacked on the ground that it was fraudulently
induced. 388 U.S. at 396–97, 87 S. Ct. at 1802. The question was whether
the claim of fraud in the inducement could be considered by a court or
whether the fraud-in-the-inducement claim should be resolved by an
arbitrator as provided in the challenged contract. Id. at 402, 87 S. Ct. at
1805. The contract in question involved interstate commerce and was
subject to the FAA. Id. at 401–02, 87 S. Ct. at 1804–05.
In approaching the question, the Prima Paint Court considered three
provisions of the Act. As noted in Prima Paint,
29
Section 2 provides that a written provision for arbitration “in
any maritime transaction or a contract evidencing a
transaction involving commerce . . . shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” Section 3 requires
a federal court in which suit has been brought “upon any
issue referable to arbitration under an agreement in writing
for such arbitration” to stay the court action pending
arbitration once it is satisfied that the issue is arbitral under
the agreement. Section 4 provides a federal remedy for a party
“aggrieved by the alleged failure, neglect, or refusal of another
to arbitrate under a written agreement for arbitration,” and
directs the federal court to order arbitration once it is satisfied
that an agreement for arbitration has been made and has not
been honored.
Id. at 400, 87 S. Ct. at 1804.
The majority in Prima Paint held, as a matter of substantive law
arising from the FAA, that a provision in a contract calling for arbitration
of disputes is separable from the rest of the contract notwithstanding the
traditional approach of otherwise applicable state law. Id. at 402–04, 87
S. Ct. at 1805. The Prima Paint Court stated that under § 4, “the federal
court is instructed to order arbitration to proceed once it is satisfied that
‘the making of the agreement for arbitration or the failure to comply (with
the arbitration agreement) is not in issue.’ ” Id. at 403, 87 S. Ct. at 1806
(quoting 9 U.S.C. § 4). From this premise, the Court declared ipse dixit
that “a federal court may consider only issues relating to the making and
performance of the agreement to arbitrate.” Id. at 404, 87 S. Ct. at 1806.
The majority’s statutory analysis consists of two brief conclusory
paragraphs.
Justice Black, joined by Justices Douglas and Stewart, dissented.
Justice Black declared that the holding of the majority was “fantastic.” Id.
at 407, 87 S. Ct. at 1808 (Black, J., dissenting). He was incredulous that
a court would lose its legal prerogative of whether any legal contract exists
upon which to base arbitration. Id.
30
Justice Black noted that under § 4, the question was what kind of
pleading puts in issue the “making of the agreement for arbitration,” and
the approach of the majority “elevates arbitration provisions above all
other contractual provisions.” Id. at 410, 87 S. Ct. at 1809 (quoting 9
U.S.C. § 4).
Justice Black emphasized the language in § 2 of the FAA. He noted
that under § 2, an agreement to arbitrate is enforceable “save upon such
grounds as exist at law or in equity for the revocation of any contract.” Id.
at 412, 87 S. Ct. at 1810 (quoting 9 U.S.C. § 2). According to Justice
Black, fraud is one of the most common grounds for revoking a contract,
and further declared that if the contract was procured by fraud, “then,
unless the defrauded party elects to affirm it, there is absolutely no
contract, nothing to be arbitrated.” Id.
Justice Black defended his textual reading with legislative history.
He harnessed numerous statements by lawmakers and advocates of the
FAA suggesting that the provisions would not apply to contracts procured
by fraud related to the entire contract. Id. at 413–14, 87 S. Ct. at 1810–
11.
Justice Black declared that the majority approach was a “statutory
mutilation.” Id. at 416, 87 S. Ct. at 1812. All the Act was intended to do,
according to Justice Black, was to “make arbitration agreements
enforceable in federal courts if they are valid and legally existent under
state law.” Id. at 422, 87 S. Ct. at 1815. The sole purpose of the Act,
Black opined, was to place arbitration agreements “on the same footing as
other contracts.” Id. at 423, 87 S. Ct. at 1816 (quoting H.R. Rep. No. 68-
96 (1924)).
B. Southland Corporation: The Giant Swings the Very Large
Federal Statutory Club and Preempts State Courts. Fifteen years after
31
Prima Paint, the United States Supreme Court considered in Southland
Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852 (1984), whether the FAA
preempted a provision of the California Franchise Investment Law, which
required that claims under the state statute be decided by courts. Id. at
4–5, 104 S. Ct. at 855–56. The Southland majority determined that the
California statute was so preempted. Id. at 16, 104 S. Ct. at 861. The
Southland majority declared that the FAA created “a body of federal
substantive law.” Id. at 12, 104 S. Ct. at 859. The Southland majority
emphasized that Congress was concerned not only with the common law
hostility toward arbitration, but with the failure of state arbitration
statutes to mandate enforcement of arbitration agreements. Id. at 13–14,
104 S. Ct. at 859–60.
Justice O’Connor, joined by Justice Rehnquist, dissented. She
noted that §§ 3 and 4 of the FAA expressly deal with matters “brought in
any of the courts of the United States” and “any United States district court.”
Id. at 22, 104 S. Ct. at 864 (O’Connor, J., dissenting) (quoting 9 U.S.C.
§§ 3, 4 (emphasis added)). Justice O’Connor rejected the notion that the
silence of Congress in § 2 of the Act could be interpreted to extend its
provisions to state courts when §§ 3 and 4 were expressly limited to federal
courts. Id.
Further, Justice O’Connor wrote that the legislative history is
unambiguous. Id. at 25, 104 S. Ct. at 865. She declared that the
legislative history clearly established that the statute only addressed
procedural questions in federal court. Id. at 25, 104 S. Ct. at 865–66. Like
Justice Black in Prima Paint, Justice O’Connor assembled a number of
statements from legislative leaders and advocates emphasizing the
narrowness of the statute. Id. at 25–30, 104 S. Ct. at 865–68. As a result,
32
§ 2 “should have no application whatsoever in state courts.” Id. at 31, 104
S. Ct. at 868.
Justice O’Connor continued to dissent from application of the FAA
to state court proceedings in subsequent cases. See Perry v. Thomas, 482
U.S. 483, 494–95, 107 S. Ct. 2520, 2528 (1987) (O’Connor, J., dissenting);
York Int’l v. Ala. Oxygen Co., 465 U.S. 1016, 104 S. Ct. 1260 (1984) (mem)
(O’Connor, J., dissenting).
Finally, however, in Allied-Bruce Terminix Co. v. Dobson, 513 U.S.
265, 115 S. Ct. 834 (1995), Justice O’Connor threw in the towel based on
stare decisis. Id. at 282–83, 115 S. Ct. at 843–44 (O’Connor, J.,
concurring). But now, Justice Scalia picked up the torch. Justice Scalia
came to what he characterized as the belated conclusion that Justice
O’Connor had been right all along and that stare decisis did not prevent
correction of the mistake. Id. at 284, 115 S. Ct. at 845 (Scalia, J.,
dissenting). Then Justice Thomas entered the fray, declaring that the FAA
simply did not apply in state courts. Id. at 285, 115 S. Ct. at 845 (Thomas,
J., dissenting).
Finally, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct.
1740 (2011), the Supreme Court considered whether federal courts could
apply the doctrine of unconscionability as developed in California law in
refusing to enforce an arbitration agreement otherwise subject to the FAA.
Id. at 338, 131 S. Ct. at 1745. In a 5–4 decision written by Justice Scalia,
the majority held that the unconscionability claim was preempted. Id. at
352, 131 S. Ct. at 1753.
But Justice Breyer and three other Justices came to a different
conclusion. They emphasized the language in § 2 of the FAA, which
provided that arbitration agreements would be enforced “save upon such
grounds as exist at law or in equity for the revocation of any contract.” Id.
33
at 354, 131 S. Ct. at 1754 (Breyer, J., dissenting) (quoting 9 U.S.C. § 2).
According to Justice Breyer, the purpose of the Act was to place
agreements to arbitration and agreements to litigate “upon the same
footing.” Id. at 360, 131 S. Ct. at 1757 (quoting Scherk v. Alberto-Culver
Co., 417 U.S. 506, 511, 94 S. Ct. 2449, 2453 (1974)).
Although there can be no question that the United States Supreme
Court’s decisions are authoritative arbiters of federal law, the above case
history shows that the terrain under the FAA has been, and continues to
be, highly contested. From reading the cases, one gets the impression that
the beast released in Prima Paint has turned out to be something of a wild
animal that the Supreme Court has been unable to track down and cage.
C. The Scholarly Response to the Prima Paint/Southland Line
of Cases.
1. Statutory interpretation. The Supreme Court’s approach to
statutory interpretation of the FAA reflected in Prima Paint and Southland
has not been well received by scholars. Academic observers have noted
that the approach of United States Supreme Court majorities has been
completely inconsistent with the text and legislative history of the FAA.
See generally Paul D. Carrington & Paul H. Haagen, Contract and
Jurisdiction, 1996 Sup. Ct. Rev. 331 (analyzing commercial arbitration law
cases from the 1994 and 1995 terms of the United States Supreme Court);
Margaret L. Moses, Statutory Misconstruction: How the Supreme Court
Created a Federal Arbitration Law Never Enacted by Congress, 34 Fla. St.
U. L. Rev. 99 (2006) (finding that judicial construction has improperly
broadened the FAA beyond its originally intended purpose); David S.
Schwartz, Correcting Federalism Mistakes in Statutory Interpretation: The
Supreme Court and the Federal Arbitration Act, 67 L. & Contemp. Probs. 5
34
(2004) (characterizing the Southland decision as incorrectly preempting
states’ ability to regulate arbitration).
The doctrine of separability has come under an especially hard-
hitting attack. See, e.g., Richard C. Reuben, First Options, Consent to
Arbitration, and the Demise of Separability: Restoring Access to Justice for
Contracts with Arbitration Provisions, 56 S.M.U. L. Rev. 819, 872–82 (2003)
(calling for the Court to overturn the separability doctrine); Jean R.
Sternlight, Rethinking the Constitutionality of the Supreme Court’s
Preference for Binding Arbitration: A Fresh Assessment of Jury Trial,
Separation of Powers, and Due Process Concerns, 72 Tul. L. Rev. 1, 9–10
(1997) (“[T]he Supreme Court’s interpretation of the FAA as favoring
arbitration over litigation is not merely bad as a matter of policy, but also
is often inconsistent with the proper interpretation of the Constitution.”
(Footnote omitted.)); Katherine Van Wezel Stone, Rustic Justice:
Community and Coercion Under the Federal Arbitration Act, 77 N.C. L. Rev.
931, 943–69 (1999).
The explicit battle lines on the statutory interpretation front have
been twofold: First, is the FAA a procedural statute or a broad substantive
act? Second, does the FAA apply at all in state courts? In order to answer
yes to these questions, United States Supreme Court majorities have
adopted a robust substantive view of the FAA. In other words, these
majority decisions are powered by claims that Congress, pursuant to its
commerce power, intended a strong substantive policy in favor of
arbitration that overrides traditional principles of federalism. In any event,
the Supreme Court’s FAA precedents are rooted in the view that the FAA
is a Congressional mandate imposing a very strong federal policy in favor
of arbitration that overrides any weak-kneed state policy.
35
2. Problem of perverse incentives. Aside from attacking the United
States Supreme Court’s statutory interpretation, the policy wonks in
academia have noodled about the merits of the federal policy discovered
by the Supreme Court in its FAA cases. The scholars have emphasized at
least two problems. First, an arbitrator is ordinarily paid for their work on
an hourly basis. To the extent arbitrators are invested with the power to
decide fraud in the inducement issues, they undeniably have a financial
incentive to decide the question against dismissal. See generally Carrie
Menkel-Meadow, Do the “Haves” Come Out Ahead in Alternative Judicial
Systems?: Repeat Players in ADR, 15 Ohio St. J. Disp. Resol. 19, 20 (1999)
[hereinafter Menkel-Meadow, Repeat Players].
In a court system, such a financial incentive could well be found to
violate due process. See Connally v. Georgia, 429 U.S. 245, 247, 251, 97
S. Ct. 546, 547, 549 (1977) (per curiam) (finding payment to a justice of
the peace who signs a search warrant on a per warrant issued basis
creates pecuniary interest sufficient to establish a due process violation);
Gibson v. Berryhill, 411 U.S. 564, 579, 93 S. Ct. 1689, 1698 (1973) (finding
that a state agency composed of independent optometrists is biased in
proceedings against optometrists who work for corporations because of
pecuniary interest). This highly undesirable result of Prima Paint was not
expressly considered by the Court, but is enough to give us pause as to
whether the Prima Paint rule should be cut and pasted into state law
contexts.
And, there is the further problem of repeat players. An arbitrator
may be inclined to favor a repeat player rather than a party likely
appearing as a “one off.” The repeat-player problem has been recognized
by Justice Ginsburg in Green Tree Financial Corp.-Alabama v. Randolph,
531 U.S. 79, 96, 121 S. Ct. 513, 524 (2000) (Ginsburg, J., concurring in
36
part and dissenting in part). See Lisa B. Bingham, Self-Determination in
Dispute System Design and Employment Arbitration, 56 U. Miami L. Rev.
873, 889–902 (2002); Menkel-Meadow, Repeat Players, 5 Ohio St. J. Disp.
Resol. at 20.
III. State Court Responses to Prima Paint with Respect to
Arbitration Provisions Governed by State Law.
A separate issue is whether state courts should adopt the
severability doctrine of Prima Paint in cases that do not involve interstate
commerce and thus are not governed by federal law. Some states refuse
to enforce arbitration clauses as a matter of public policy. See, e.g., Wells
v. Mobile Cty. Bd. of Realtors, Inc., 387 So. 2d 140, 144 (Ala. 1980) (“The
public policy of this state is to encourage arbitration . . .; but public policy
also holds void an agreement . . . to oust or defeat the jurisdiction of all
courts, as to all differences between parties.”). In those states, Prima Paint
has no applicability under state law.
A number of state courts have uncritically adopted Prima Paint for
purposes of state law without meaningful discussion. For example, in Two
Sisters, Inc. v. Gosch & Co., 370 A.2d 1020, 1022–23 (Conn. 1976), the
Connecticut court simply cited and applied Prima Paint to a contract
governed by state law. Authorities like Two Sisters are cases where federal
law is uncritically cut and pasted into state law without consideration of
whether Prima Paint was correctly decided or whether the federal statutory
underpinning miraculously discovered by a majority of the United States
Supreme Court in Prima Paint forty years after the FAA was enacted has a
state statutory analogue. These conclusory state court citations to a
conclusory federal court opinion have, quite literally, no persuasive value.
Several states, however, have either declined to adopt Prima Paint
under state law or have significantly limited its scope. For instance, in
37
Paramore v. Inter-Regional Financial Group Leasing Co., 316 S.E.2d 90, 92
(N.C. Ct. App. 1984), a North Carolina court held that when a lease may
be invalid due to lack of consent, fraud, or undue duress, or contained
unconscionable terms, the Prima Paint rule would not apply where there
was no “substantial interstate activity” and, as a result, state law governed
the transaction.
Similarly, in Shaffer v. Jeffery, 915 P.2d 910, 916–18 (Okla. 1996),
the Oklahoma Supreme Court refused to follow Prima Paint under state
law employing reasoning similar to Justice Black’s dissent in Prima Paint.
According to Shaffer, “the court is best suited to determine issues such as
fraud.” Id. at 917. The North Carolina court declared that
if Plaintiffs allege fraud in the inducement of the arbitration
clause itself or the underlying contract of which the
arbitration agreement is a part, the District Court must
adjudicate that issue prior to granting . . . any relief based
upon the validity of the arbitration clause.
Id. at 917–18. Justice Black’s dissent was also the basis of a ruling
contrary to Prima Paint in City of Blaine v. John Coleman Hayes &
Associates, Inc., 818 S.W.2d 33, 38 (Tenn. Ct. App. 1991). In its holding,
the Tennessee court examined a state statute similar to the FAA,
extensively citing Justice Black’s dissenting opinion. Id. at 37–38. The
opinion noted that state courts have far more expertise in resolving legal
issues relating to the validity of a contract and that the only advantage of
submitting the issue to arbitrators is that arbitrators receive
compensation. Id. The Tennessee court proceeded to construe its local
statute in a fashion similar to Justice Black’s dissent in Prima Paint. Id.
A Louisiana court applied Justice Black’s reasoning in George
Engine Co. v. Southern Shipbuilding Corp., 350 So. 2d 881, 886 (La. 1977).
According to the court,
38
This Court’s jurisdiction cannot be displaced whenever
a contract contains an arbitration clause. The arbitration law
and arbitration clauses in contracts do not vest in arbitrators
the historic jurisdiction of the courts to determine fraud or
duress in the inception of a contract. It may be said that
courts are far better qualified to decide issues of this kind.
Id. at 884.
In Shaw v. Kuhnel & Associates, Inc., 698 P.2d 880, 881–82 (N.M.
1985), the New Mexico Supreme Court, like Justice Black, used strong
language to describe the notion that an arbitration provision was severable
in the face of an allegation of fraud in the inducement. The New Mexico
Supreme Court stated that
[i]t would be ridiculous and contrary to the statutory language
to require parties to arbitrate an issue of fraud in the
inducement only to have the arbitration clause declared
invalid if such fraud is found to exist by the arbitrator. This
would force parties to arbitrate an issue which by statute
would invalidate the arbitration clause.
Id.
Nothing in these cases, of course, is binding in Iowa on the issue
before us. What the state cases do show, however, is that the severability
doctrine embraced in Prima Paint as it relates to arbitration clauses is not
universally accepted wisdom bestowed from above, to be uncritically
applied in state courts.
IV. Textual Differences Between The Iowa Arbitration Act and
the Federal Arbitration Act.
A. The Iowa Arbitration Act Requires Separate, Stand-Alone
Arbitration Agreement for Future Controversies Sounding in Tort. In
1981, the Iowa legislature enacted Iowa Code chapter 679A dealing with
arbitration. 1981 Iowa Acts ch. 202 (codified at Iowa Code §§ 679A.1–.18
(1983)). It is materially different from the FAA and the caselaw generated
by the United States Supreme Court. Like § 2 of the FAA, sections 1 and
39
2 of the Iowa Arbitration Act (IAA) provide that written agreements to
submit existing or future controversies to arbitration are enforceable
“unless grounds exist at law or in equity for the revocation of the written
agreement” or contract. Iowa Code § 679A.1(1) (2015).
However, with respect to future controversies, the IAA excludes
contracts of adhesion, contracts between employers and employees, and
“[u]nless otherwise provided in a separate writing executed by all parties
to the contract, any claim sounding in tort whether or not involving a
breach of contract.” Id. § 679A.1(2)(c). Thus, in order for an arbitration
agreement, with respect to future controversies, to be enforceable, there
must be a separate contract aside from the underlying contract declaring
that the arbitration provision applies to claims sounding in tort. Clearly,
for purposes of tort claims such as fraudulent inducement of a contract,
an arbitration provision is not enforceable unless there is a separate,
stand-alone agreement so stating. Thus, the doctrine of severability in
Prima Paint does not apply under the IAA. In order to enforce an
arbitration provision against a tort claim, there must be a separate, stand-
alone agreement to do so. No such stand-alone agreement is present in
this case.
B. The Curious Effort to Enforce Illinois Law in Dacres. We
considered the applicability of Prima Paint in Iowa state courts in Dacres,
548 N.W.2d 576. In a conclusory sentence, we made the barebones
declaration that Prima Paint, a case interpreting the FAA, “should be
applied to claims made under Iowa contract law involving alleged fraud in
the inducement.” Id. at 578. We declared in another conclusory sentence
that “[w]e approve that rule and apply it in the present case.” Id. There
are multiple problems lurking behind this conclusory treatment of Prima
Paint and its potential applicability to this case.
40
First, the agreement containing the arbitration clause in Dacres
provided that “the provisions of the Illinois Uniform Arbitration Act . . .
shall apply and no other rules or arbitration statutes shall apply to
disputes under this Agreement.” Joint Deferred Appendix at 218, Dacres,
548 N.W.2d 576 (No. 94-1855). John Deere argued that “the Illinois courts
require arbitration of a claim of fraud in the inducement as to the contract
containing the arbitration provision” and supported it with a string cite of
Illinois cases. Appellee’s Brief at 13, Dacres, 548 N.W.2d 576 (No. 94-
1855). Thus, looking at the four corners of the contract, the issue
appeared to be a question of Illinois law, not Iowa law.9
In a footnote, John Deere suggested that even if Iowa law applied,
the result would be the same. 10 Id. at 12 n.5. The footnote stated that
“[j]udicial interpretation of identical or equivalent statutory language in
other jurisdictions are entitled to unusual respect and deference and will
usually be followed if sound, reasonable, and in harmony with justice and
public policy.” Id. But as seen above, the difference between the FAA and
Iowa Code section 679A.1(2) is substantial. That footnote is misleading to
the extent it suggests the statutes are identical.
Second, even if an issue of Iowa law was raised, the Dacres court
gave it no serious consideration. Was Prima Paint really correct? What
about Justice Black’s dissent? Does a state have different interests in
arbitration than Congress? And while Prima Paint is the authoritative
9One wonders whether the reference to “under Iowa law” in Dacres was a mistake
and that it should have read “under Illinois law” as argued by John Deere. The Illinois
courts had repeatedly adopted Prima Paint in its interpretation of an Illinois arbitration
statute.
10Although not stated in the Dacres opinion, there was a good reason not to
construe the underlying contract according to Illinois law. Under Iowa law, a forum-
selection provision is not enforceable. Davenport Mach. & Foundry Co., 314 N.W.2d at
437.
41
interpretation of federal law under the FAA, the materially different Iowa
statute should at least fire the judicial imagination and suggest that Iowa
law might have different policy footing. Indeed, a simple comparison of
the FAA and Iowa Code section 679A.1(2) gives rise to several basic
questions: Why does Iowa law require a separate agreement in order for
future tort claims to be subject to arbitration? What is the public policy
behind that provision? Isn’t a claim of fraud in the inducement a tort
under Iowa law? These questions, certainly, were not asked, let alone
answered, in Dacres. The Dacres reasoning is not weak, it is nonexistent.
Third, whatever the validity of Prima Paint and Dacres, these cases
have nothing to do with a forum selection provision. As a result, the basis
for the United States Supreme Court’s decision in Prima Paint, and our cut
and paste adoption of Prima Paint in Dacres, has no bearing on the issue
we face; namely, whether a forum-selection provision is “separable” from
a contract under attack for fraud in the inducement. What the above
discussion demonstrates, however, is that Dacres is very weak precedent,
has no persuasive power, and should not be claimed as authoritative
outside of the narrowest possible legal context.
V. Application of the Traditional Fraud-in-the-Inducement
Approach to the Forum-Selection Clause in this Case.
A. General Enforceability of Forum-Selection Clauses.
Historically, forum-selection provisions in contracts have been highly
disfavored in the courts. The general theory behind the hostility to forum-
selection clauses is the notion that private parties cannot divest the
constitutionally or statutorily established jurisdictions of courts not
designated in the clause. See Michael D. Moberly & Carolyn F. Burr,
Enforcing Forum Selection Clauses in State Court, 39 Sw. L. Rev. 265, 265–
66 (2009) [hereinafter Moberly & Burr, Enforcing Clauses].
42
The trend in the law changed, however, when the United States
Supreme Court decided M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1,
92 S. Ct. 1907 (1972). In M/S Bremen, the Supreme Court held that, at
least in maritime matters, forum-selection provisions, if reasonable, would
be enforced. Id. at 17–18, 92 S. Ct. at 1917; see also Carnival Cruise Lines,
Inc. v. Shute, 499 U.S. 585, 595, 111 S. Ct. 1522, 1528 (1991); Stewart
Org., Inc. v. Ricoh Corp., 487 U.S. 22, 28 n.7, 108 S. Ct. 2239, 2243 n.7.
(1988).
With the thunderclap of the federal Zeus, many timid state court
minnows scattered. While no one has claimed that M/S Bremen-Carnival
Cruise Lines-Stewart preempt state law, many states have followed the
United States Supreme Court’s lead in cut-and-paste local application of
federal jurisprudence. Other states, however, have declined to depart from
the traditional view. See Phoebe Kornfeld, The Enforceability of Forum-
Selection Clauses After Stewart Organization, Inc. v. Ricoh Corporation, 6
Alaska L. Rev. 175, 186 n.64 (1989) (listing jurisdictions departing from
the traditional view). While there has been a shift in recent years in the
direction of enforcing forum-selection clauses, judicial hostility toward
them is by no means dead. See Moberly & Burr, Enforcing Clauses, 39
Sw. L. Rev. at 266–67.
B. Iowa Common Law Public Policy Adverse to Private Forum
Selection Is the Polar Opposite of the Federal Public Policy Advancing
Arbitration. Although there has been a general trend to follow M/S
Bremen, Iowa caselaw has defied the trend. Historically, we held in Field
that parties may not by contract deprive a court of jurisdiction that they
would otherwise possess. 117 Iowa at 205, 90 N.W. at 724. More recently,
in Davenport Machine & Foundry Co., 314 N.W.2d at 437, we refused to
follow the trend and maintained the traditional view that forum-selection
43
provisions are not enforceable in Iowa courts. The Davenport Machine case
has been subject to negative commentary in a student note. See generally
Jeffrey T. Mains, Forum-Selection Clauses in Iowa: Re-Evaluation of the
Iowa Position in Light of Carnival Cruise Lines, 43 Drake L. Rev. 191
(1994). Davenport Machine, however, has not been overturned on this
point.
Even if Davenport Machine were to be abandoned, there would
remain a fundamental difference between forum-selection and arbitration
clauses. Under federal law, and through preemption, powerful substantive
statutory policy has been employed to defeat the ordinary common law of
contracts. Here, not only is there no affirmative statutory policy to enforce
forum-selection provisions, but the public policy expressed in the not-yet-
abandoned caselaw is just the opposite. Even if one believes that
Davenport Machine is incorrect, there is no statutory public policy driving
this court to modify the traditional approach to common law.
C. Severability of Forum-Selection Clauses in Contracts
Attacked Based on Fraud in the Inducement in Other Jurisdictions.
The majority of cases that have considered the matter have concluded that,
like arbitration clauses, forum-selection clauses are severable when
confronted with a fraud in the inducement claim. See Edge Telecom, Inc.
v. Sterling Bank, 143 P.3d 1155, 1162 (Colo. App. 2006); Holeman v. Nat’l
Bus. Inst., Inc., 94 S.W.3d 91, 102 (Tex. App. 2002) (“[A] court determining
whether or not to enforce a forum selection clause will not inquire into the
enforceability of the contract in which that clause is found.”), abrogated in
part on other grounds as recognized in Diamond Offshore (Bermuda) Ltd. v.
Haaksman, 355 S.W.3d 842, 846 (Tex. App. 2011). In none of these states,
however, is there good caselaw standing for the proposition that public
policy will not enforce a forum-selection provision.
44
In any event, there is a notable minority position. Specifically, in
Energy Claims Ltd. v. Catalyst Investment Group, Ltd., 325 P.3d 70, 86
(Utah 2014), the Utah Supreme Court held that a district court should
address the question of fraudulent inducement before enforcing a forum-
selection clause in a contract. Id. at 86. The Utah court noted that it was
not persuaded that its approach would allow the plaintiff to freely dodge
forum-selection clauses because the challenger must plead fraud with
particularity and the district court has the discretion to order an
evidentiary hearing on the matter. Id. at 85–86.
Similarly, in Johnson v. Key Equipment Finance, 627 S.E.2d 740,
742 (S.C. 2006), the South Carolina Supreme Court held that a fraud claim
could defeat enforcement of a contract containing a choice-of-law and
forum-selection provision. Courts in Georgia, New York, and Tennessee
have taken similar approaches. See SRH, Inc. v. IFC Credit Corp., 619
S.E.2d 744, 745–46 (Ga. Ct. App. 2005); DeSola Grp., Inc. v. Coors Brewing
Co., 605 N.Y.S.2d 83, 84 (App. Div. 1993); Lamb v. MegaFlight, Inc., 26
S.W.3d 627, 631–32 (Tenn. Ct. App. 2000).
VI. Discussion of Application of Severability of Forum-
Selection Clauses to Contracts Attacked as Fraudulently Induced
Under Iowa Common Law.
Based on the above discussion, I would conclude that the district
court erred in dismissing plaintiff’s claim based on the severability of the
forum-selection clause. While the defendant relies on Prima Paint and
Dacres, for the reasons expressed above, I would find such reliance
completely unpersuasive and would not rely upon these precedents to
resolve the very different question posed in this case.
In considering the issue of severability of a forum-selection
provision, the public policy of Iowa, as expressed in Iowa caselaw, is that
45
forum-selection clauses are unenforceable. Davenport Machine prevents
private parties from agreeing, among themselves, to simply oust state
court jurisdiction through private forum-selection agreements.
There is a larger concern applicable here where a claim is made that
a contract containing a forum-selection provision was fraudulently
induced. Fraud in the inducement is, of course, a tort claim. When tort
law is involved in a dispute, more is at stake than the mere ordering of
private rights. Indeed, the public interest is directly affected. That is why
the IAA, in Iowa Code section 679A.1(2)(c), excluded future tort
controversies from mandatory arbitration. Tort actions are necessarily
infused with the strong public policy goal of deterring similar conduct in
the future.
As noted in a prominent case, “fraud in the inducement claims are
much more likely to present cases in which a social policy against the
fraud, external to the contractual obligations of the parties, exists.” Air
Prods. & Chems., Inc. v. Eaton Metal Prods. Co., 256 F. Supp. 2d 329, 341
(E.D. Pa. 2003). Similarly, another court has stated “that fraud in the
inducement involves the breach of duties imposed as a matter of social
policy, rather than the breach of duties that flow from the parties’
contract.” KMB Shamrock, Inc. v. LNR Transp., Inc., No. 09 CV 9046, 2015
WL 13779752, at *6 (Pa. Ct. Com. Pl. Sept. 25, 2015); see also Mendelsohn,
Drucker & Assocs. v. Titan Atlas Mfg., Inc., 885 F. Supp. 2d 767, 790 (E.D.
Pa. 2012) (finding fraud in the inducement “constitutes a breach of duties
of honesty imposed by society, not contractual duties”).
In my view, in order to protect Iowa citizens from fraud in the
inducement, Iowa judges should not race from the courthouse to
surrender jurisdiction pursuant to a private forum-selection provision
46
until the fraud-in-the-inducement question has been resolved in the Iowa
courts.
This, of course, is the traditional view, well-articulated by Justice
Black in his Prima Paint dissent. I suffer from no reformist impulse to
disturb it. Iowa courts should be open for business to consider tort claims
notwithstanding a private agreement to the contrary.
VII. Conclusion.
For the above reasons, I would reverse the ruling of the district court
and remand the case for further proceedings.