Bad Ass Coffee Co. of Hawaii v. Royal Aloha International, LLC

2015 UT App 303THE UTAH COURT OF APPEALS
BAD ASS COFFEE COMPANY OF HAWAII, INC.,
Appellant,
v.
ROYAL ALOHA INTERNATIONAL, LLC,
Appellee.
Opinion
No. 20140322-CA
Filed December 24, 2015
Third District Court, Salt Lake Department
The Honorable L.A. Dever
No. 130906130
Blake T. Ostler, Attorney for Appellant
Joshua R. Furman and John P. Bagley, Attorneys
for Appellee
JUDGE JAMES Z. DAVIS authored this Opinion, in which JUDGES
J. FREDERIC VOROS JR. and MICHELE M. CHRISTIANSEN concurred.1
DAVIS, Judge:
¶1 Bad Ass Coffee Company of Hawaii, Inc. (BACH) appeals
the district court’s grant of Royal Aloha International, LLC’s
(RAI) motion to dismiss for improper venue. See Utah R. Civ. P.
12(b)(3). We reverse and remand for further proceedings.
1. Judge James Z. Davis authored this opinion as a member of
the Utah Court of Appeals. He retired from the court on
November 16, 2015, before this opinion issued.
Bad Ass Coffee Company of Hawaii v. Royal Aloha International
BACKGROUND
¶2 In 2011, RAI and BACH entered into a license agreement
(the Agreement) in which BACH transferred to RAI ‚an
exclusive, royalty-free, perpetual, irrevocable, worldwide right
to use, market and exploit the licensed mark established by
BACH together with its proprietary coffee beans, mixes, syrups
and other ingredients and the BACH system in all places in the
world except the United States, Japan and Malaysia.‛ 2 In return,
BACH was granted a 25% equity interest in RAI.
¶3 The Agreement was negotiated by Bachir Mihoubi, who
was RAI’s agent, and Harold Hill, BACH’s former president.
According to BACH, Hill—whose family-owned company, HJM,
Inc., is a member and manager of RAI—engaged in self-dealing
in negotiating the Agreement and conspired with Mihoubi to
misappropriate a corporate opportunity belonging to BACH, to
conceal Hill’s interest in the deal, and to replace the contract
drafted by BACH’s legal counsel with one that materially altered
terms meant to protect BACH’s interests.
¶4 In 2013, BACH brought a complaint against RAI
requesting a judgment declaring the Agreement void because it
(a) is an illusory contract; (b) fails for failure and
lack of consideration; (c) is contrary to BACH’s
Bylaws; (d) violates Utah’s Revised Business
Corporations Act; (e) results from self-dealing and
a conspiracy to misappropriate corporate
opportunities; (f) is the result of a conflict
transaction; (g) lacks requisite authority; and (h) for
other reasons shown at a trial in this matter.
2. We recite the facts as stated in BACH’s amended complaint.
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In response, RAI brought a motion to dismiss for improper
venue pursuant to rule 12(b)(3) of the Utah Rules of Civil
Procedure, citing a forum-selection clause in the Agreement
requiring that all litigation take place in Fulton County, Georgia.
BACH opposed the motion to dismiss, arguing that the forum-
selection clause did not apply to its claims and that even if it did,
it should not be enforced because, inter alia, see infra note 4, it
was fraudulently obtained.
¶5 Following a hearing, the district court granted RAI’s
motion. Although the district court was ‚troubled somewhat by
. . . the claim of fraud,‛ it considered itself bound by the Utah
Supreme Court’s holding in Innerlight, Inc. v. Matrix Group, LLC,
2009 UT 31, 214 P.3d 854, to enforce the forum-selection clause
based on a plain-language reading of the Agreement, regardless
of whether the Agreement, or even the forum-selection clause
itself, might have been obtained by fraud. BACH now appeals.
ISSUE AND STANDARD OF REVIEW
¶6 BACH argues that the district court employed the wrong
legal standard in enforcing the forum-selection clause.3 Whether
the district court applied the correct legal standard is a question
3. BACH alternatively argues that the forum-selection clause,
which applies to ‚any dispute arising from the interpretation or
performance in connection with this Agreement,‛ does not apply
to BACH’s declaratory action regarding the ‚existence and
validity‛ of the Agreement. However, it appears that at least
some of BACH’s arguments—that the Agreement is an illusory
contract, that it fails for lack of consideration, that it is contrary
to BACH’s bylaws, and that it violates Utah’s Revised Business
Corporations Act—would require the district court to interpret
the Agreement. Thus, we are not convinced that these claims do
not fall within the purview of the forum-selection clause.
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of law, which we review for correctness. Jensen v. Intermountain
Power Agency, 1999 UT 10, ¶ 10, 977 P.2d 474. Assuming that the
district court has applied the correct legal standard, its ‚decision
to enforce a forum selection clause is reviewed for abuse of
discretion.‛ Jacobsen Constr. Co. v. Teton Builders, 2005 UT 4, ¶ ‍9,
106 P.3d 719.
ANALYSIS
¶7 ‚[F]orum selection clauses that have been obtained
through freely negotiated agreements and are not unreasonable
and unjust will be upheld as valid.‛ Energy Claims Ltd. v. Catalyst
Inv. Group Ltd., 2014 UT 13, ¶ 47, 325 P.3d 70 (citation and
internal quotation marks omitted). A plaintiff seeking to avoid
enforcement of a forum-selection clause bears the burden of
demonstrating that enforcement would be unfair or
unreasonable. Prows v. Pinpoint Retail Sys., Inc., 868 P.2d 809, 812
(Utah 1993). This may be accomplished by proving (1) ‚that the
chosen state would be so seriously an inconvenient forum that to
require the plaintiff to bring suit there would be unjust‛; (2) that
‚the choice-of-forum provision was obtained by fraud, duress,
the abuse of economic power, or other unconscionable means‛;
or (3) that ‚the courts of the chosen state would be closed to the
suit or would not handle it effectively or fairly.‛ Id. at 812 & n.5
(citations and internal quotation marks omitted). In opposing
RAI’s motion to dismiss, BACH asserted that it would be unfair
and unreasonable to enforce the forum-selection clause because
the Agreement was obtained by fraud or overreaching.4
4. BACH’s argument on appeal centers on whether the
Agreement as a whole is enforceable rather than on whether it
would be fair and reasonable to enforce the forum-selection
clause. In support of its argument that the Agreement is
unenforceable, BACH asserts that the Agreement was procured
(continued…)
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¶8 In ruling on RAI’s motion to dismiss, the district court
concluded that our supreme court’s decision in Innerlight
precluded it from looking beyond the ‚four corners‛ of the
contract to consider whether the unambiguous forum-selection
clause was obtained by fraud. We agree with BACH that the
district court incorrectly interpreted Innerlight, particularly in
light of our supreme court’s more recent holding in Energy
Claims Ltd. v. Catalyst Inv. Group Ltd., 2014 UT 13, 325 P.3d 70.5
(…continued)
through fraud or overreaching, that Hill lacked authority to
approve the Agreement on BACH’s behalf, that the Agreement
fails for lack of consideration, and that RAI’s obligations under
the Agreement are illusory. However, even if BACH were to
ultimately establish that the Agreement is unenforceable due to
lack of authority, failure of consideration, or illusory obligations,
it would not necessarily follow that the forum-selection clause is
unfair or unreasonable. See Innerlight, Inc. v. Matrix Group, LLC,
2009 UT 31, ¶ 15, 214 P.3d 854 (holding that a forum-selection
clause was enforceable, even where other contract provisions
were invalidated due to the failure of a condition precedent,
where the parties did not express their intent for the condition
precedent to apply to the entire contract); see also Marra v.
Papandreou, 216 F.3d 1119, 1123 (D.C. Cir. 2000) (‚A forum-
selection clause is understood not merely as a contract provision,
but as a distinct contract in and of itself . . . that is separate from
the obligations the parties owe to each other under the
remainder of the contract.‛), cited with approval in Innerlight, 2009
UT 31, ¶ 16 n.5. Thus, in reviewing the district court’s decision to
dismiss for improper venue, we consider only BACH’s argument
that the Agreement was obtained by fraud or overreaching.
5. Energy Claims was decided after the district court ruled on
RAI’s motion to dismiss.
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¶9 In Innerlight, the court was not faced with a claim of fraud
and, indeed, confirmed that the contract at issue in that case had
been ‚negotiated and signed by both parties,‛ ‚each of *which+
was represented by counsel.‛ Innerlight, 2009 UT 31, ¶ 14 & n.4
(alteration in original) (footnote and internal quotation marks
omitted). The Innerlight court merely determined that the failure
of a condition precedent that rendered a portion of the contract
unenforceable had no impact on the enforceability of the forum-
selection clause where the parties did not indicate their intent for
it to do so. Id. ¶ 15. Thus, Innerlight does not stand for the
proposition that an unambiguous forum-selection clause must
be enforced even in the face of allegations that the contract was
obtained by fraud. Furthermore, any possibility that Innerlight
could be read to suggest such a proposition has been foreclosed
by Energy Claims, which clearly contemplates the possibility that
a district court could decline to enforce a forum-selection clause
where the contract has been procured by fraud.
¶10 In Energy Claims, the supreme court specifically addressed
the fraud exception to the general rule that forum-selection
clauses should be enforced. Energy Claims, 2014 UT 13, ¶ 47; see
also Prows, 868 P.2d at 812 n.5. In outlining the plaintiff’s burden
of proof in such cases, the court adopted the minority approach,
which permits invalidation of a forum-selection clause where a
plaintiff can show that the contract was entered into
fraudulently, as opposed to the majority rule, which requires the
plaintiff to demonstrate that the clause itself resulted from fraud.
Energy Claims, 2014 UT 13, ¶¶ 49–52. Under Utah law, a plaintiff
seeking to avoid a forum-selection clause on fraud grounds must
first satisfy rule 9(b) of the Utah Rules of Civil Procedure by
pleading fraud with particularity. Id. ¶ 54. Then, ‚should the
district court deem it necessary, it has the discretion to hold an
evidentiary hearing on the allegations of fraud or overreaching
before deciding whether to enforce the challenged forum
selection clause.‛ Id. ¶ 55.
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¶11 Here, the district court dismissed the case based on its
interpretation of the forum-selection clause without considering
whether the alleged fraud or overreaching made enforcement
unfair or unreasonable. The district court did not consider
whether BACH had adequately pleaded a fraud claim and did
not hold an evidentiary hearing to consider the fraud evidence.
Thus, we agree with BACH that the district court applied the
wrong standard in dismissing the case based on the forum-
selection clause.
¶12 RAI argues that we should nevertheless affirm the
dismissal on the ground that BACH failed to state a claim of
fraud in its amended complaint and therefore did not comply
with rule 9(b)’s particularity requirement. Because the district
court did not consider the sufficiency of the complaint, we
consider it more appropriate to remand the case to give the
district court the opportunity to determine whether BACH
adequately pleaded fraud or overreaching6 and, if appropriate,
give BACH an opportunity to amend its complaint.
6. Because the fraud exception to the general rule for enforcing
forum-selection clauses ‚relates to the issue of ‘overreaching’
generally‛ and encompasses a number of related claims,
whether based in contract or tort, BACH’s claim of overreaching,
if pleaded with particularity, could support a determination not
to enforce the forum-selection clause. See Energy Claims Ltd. v.
Catalyst Inv. Group Ltd., 2014 UT 13, ¶ 49 n.70, 325 P.3d 70(explaining that the opinion’s analysis of forum selection clauses
obtained by fraud ‚applies equally to all allegations of
overreaching,‛ including an allegation that a contract was
obtained through ‚‘unconscionable means’ in furtherance of a
civil conspiracy‛); see also Black’s Law Dictionary 1213 (9th ed.
2009) (defining ‚overreaching‛ as ‚*t+he act or an instance of
taking unfair commercial advantage of another, esp. by
fraudulent means‛).
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CONCLUSION
¶13 The district court applied the wrong legal standard when
it dismissed BACH’s amended complaint based on a plain-
language reading of the forum-selection clause without
considering whether alleged fraud or overreaching on the part of
RAI made it unfair or unreasonable to enforce the forum-
selection clause. We therefore reverse the district court’s order of
dismissal and remand for further proceedings.
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