Sun v. Advanced China Healthcare, Inc.

• Decision Date: 22 August 2018
• Docket Number: No. 16-35277,16-35277
• Citation: 901 F.3d 1081
• Parties: YEI A. SUN; Liping M. Sun, husband and wife; Haiming Owen Sun, an individual, Plaintiffs-Appellants, v. ADVANCED CHINA HEALTHCARE, INC., a Cayman Islands company; Alicia Kao, an individual, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

901 F.3d 1081

YEI A. SUN; Liping M. Sun, husband and wife; Haiming Owen Sun, an individual, Plaintiffs-Appellants,

v.ADVANCED CHINA HEALTHCARE, INC., a Cayman Islands company; Alicia Kao, an individual, Defendants-Appellees.

No. 16-35277

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 10, 2018 Seattle, Washington

Filed August 22, 2018

Stephen C. Willey (argued) and Matthew H. Rice, Savitt Bruce & Willey LLP, Seattle, Washington, for Plaintiffs-Appellants.

Darren A. Feider (argued) and M. Edward Taylor, Sebris Busto James, Bellevue, Washington, for Defendants-Appellees.

Before: Ronald M. Gould and Sandra S. Ikuta, Circuit Judges, and John R. Tunheim,^* Chief District Judge.

IKUTA, Circuit Judge:

Yei Sun, Liping Sun, and Haiming Sun were persuaded by Alicia Kao to invest $2.8 million in Advanced China Healthcare. The Suns entered into two Share Purchase Agreements, each of which contained a forum-selection clause that required any disputes "arising out of or related to" the agreements to be adjudicated in California state court. Notwithstanding the forum-selection clause, the Suns brought suit against Kao under Washington securities law in a Washington district court. The district court concluded that the Suns were bound by the forum-selection clause, and dismissed the action. Because the Suns have not carried their heavy burden of showing the sort of exceptional circumstances that would justify disregarding a forum-selection clause, we affirm the district court.

I

According to the Suns' complaint, in December 2010, Kao met with the Suns in Seattle, Washington. Kao told the Suns that she was the President of Advanced China Healthcare, a company formed to provide Western-style medical services (such as sports medicine, pain management, and physical therapy) in China. According to Kao, Advanced China Healthcare had received substantial investor funding as well as all necessary licenses from the Chinese government, and intended to open its first medical center in Shanghai in 2011. Kao made a number of other representations about the status of the project to induce the Suns to invest in Advance China Healthcare’s Series B offering. She told the Suns that "all funds would be used for the development of medical centers in China," and stated that a healthcare venture capital fund in Alabama had conducted extensive due diligence on the project and was investing in the Series B offering.

While investigating this potential investment, the Suns contacted Robert Claassen, who was a partner in Paul Hastings, LLP, and the head of the corporate department in its Palo Alto, California office. Claassen informed the Suns that Advanced China Healthcare was a good investment in which his firm and he himself had invested, and confirmed that the Alabama venture capital fund had performed extensive due diligence before investing.

Following these representations, the Suns executed two separate, but identical, Series B Preference Share Purchase Agreements and invested a total of $2.8 million in Advanced China Healthcare. Both agreements included a forum-selection clause, entitled "Jurisdiction; Venue," which stated:

With respect to any disputes arising out of or related to this Agreement, the parties consent to the exclusive jurisdiction of, and venue in, the state courts in Santa Clara County in the State of California (or in the event of exclusive federal jurisdiction, the courts of the Northern District of California).¹

At the closing, which took place in Paul Hastings’s Palo Alto office, the Suns sent their funds via a wire transfer to Paul Hastings’s account in Los Angeles, California.

According to the Suns' complaint, several years after closing, the Suns discovered that Kao had misled them. The Suns alleged that they had been shown fabricated financial records of Advanced China Healthcare. They also alleged that Kao had not used their $2.8 million investment for the development and opening of medical centers, but had converted and misappropriated it for her own use or to cover up her prior misappropriation of other investments.

The Suns sued Kao and Advanced China Healthcare in Washington district court under § 21.20.430(1) of the Washington State Securities Act (WSSA), which imposes liability on a person who "sells a security in violation of any provision[ ] of RCW 21.20.010." Wash. Rev. Code § 21.20.430(1). Section 21.20.010 makes it unlawful for a person to take certain fraudulent actions in connection with the offer or sale of a security. A "person who directly or indirectly controls" such a seller may also be held liable. § 21.20.430(3).

On Kao’s motion, the district court dismissed the complaint because the Share Purchase Agreements contained a forum-selection clause that applied to the dispute, was valid and enforceable, and required the dispute to be resolved in California. The court conditioned its dismissal on several requirements: Kao had to "submit to the jurisdiction of the California court in which Plaintiffs file suit, so long as the court is proper under the forum selection clause"; the statutes of limitations on the Suns' California and Washington state-law claims had to remain tolled for the pendency of the current lawsuit; Kao could not "argue that California securities laws do not apply to the disputed transaction because it occurred in Washington State"; and Kao had to waive service of process.

The Suns timely appealed, arguing that the forum-selection clause in the Share Purchase Agreements was not enforceable. First, they argue that, as a matter of contract, the forum-selection clause does not apply to their action. Alternatively, they argue that the clause is not valid and enforceable because their action under the WSSA embodies an important public policy that cannot be waived, and California is not an adequate alternative forum because it deprives them of any remedy.

We have jurisdiction under 28 U.S.C. § 1291. We review a district court’s dismissal of a complaint for failure to comply with a valid and enforceable forum-selection clause for abuse of discretion. Doe 1 v. AOL LLC , 552 F.3d 1077, 1081 (9th Cir. 2009) (per curiam). We review the district court’s "application of the principles of contract interpretation" de novo. Id.

II

We first address the Suns' argument that the Share Purchase Agreements' forum-selection clause does not apply to their complaint. We apply federal contract law to interpret the scope of a forum-selection clause even in diversity actions, such as this one. Doe 1 , 552 F.3d at 1081 ; Manetti-Farrow, Inc. v. Gucci Am., Inc. , 858 F.2d 509, 512–13 (9th Cir. 1988). In interpreting a forum-selection clause under federal law, "we look for guidance ‘to general principles for interpreting contracts.’ " Doe 1 , 552 F.3d at 1081 (quoting Klamath Water Users Protective Ass'n v. Patterson , 204 F.3d 1206, 1210 (9th Cir. 1999) ); see also Manetti-Farrow , 858 F.2d at 513–14.

By its terms, the forum-selection clause here applies to "any disputes arising out of or related to" the Share Purchase Agreements. Accordingly, we must determine whether the Suns' claim that Kao violated the WSSA constitutes such a dispute. We have held that forum-selection clauses covering disputes "arising out of" a particular agreement apply only to disputes "relating to the interpretation and performance of the contract itself." Cape Flattery Ltd. v. Titan Mar., LLC , 647 F.3d 914, 922 (9th Cir. 2011) (quoting Mediterranean Enters., Inc. v. Ssangyong Corp. , 708 F.2d 1458, 1464 (9th Cir. 1983) ). By contrast, forum-selection clauses covering disputes "relating to" a particular agreement apply to any disputes that reference the agreement or have some "logical or causal connection" to the agreement. See John Wyeth & Bro. Ltd. v. CIGNA Int'l Corp. , 119 F.3d 1070, 1074 (3d Cir. 1997) (Alito, J.) (quoting Webster’s Third New International Dictionary 1916 (1971) ). The dispute need not grow out of the contract or require interpretation of the contract in order to relate to the contract. See Cape Flattery , 647 F.3d at 922 ; Huffington v. T.C. Grp., LLC , 637 F.3d 18, 22 & n.2 (1st Cir. 2011) (explaining that the phrase "relating to" is synonymous with the phrases "with respect to," "with reference to," "in connection with," and "associated with"); Coregis Ins. Co. v. Am. Health Found., Inc. , 241 F.3d 123, 128–29 (2d Cir. 2001) (Sotomayor, J.) (same).

Applying this framework, the Share Purchase Agreements' forum-selection clause covers the present suit. Because the clause covers "any disputes ... related to this Agreement," it applies to any dispute that has some logical or causal connection to the parties' agreement. Here, the Suns' claim that Kao engaged in various fraudulent practices to induce them to invest $2.8 million in Advanced China Healthcare relates to the Share Purchase Agreements because the Suns invested pursuant to those agreements. See Huffington , 637 F.3d at 22 (holding that a forum-selection clause covered state-law securities claims because the plaintiff’s purchase of privately offered securities "could not have been made without the agreement"); Carter’s of New Bedford, Inc. v. Nike, Inc. , 790 F.3d 289, 293 (1st Cir. 2015) (holding that a claim for unfair competition fell within scope of "in connection with" clause). Indeed, the Suns' complaint itself alleges that they executed the Share Purchase Agreements "in reasonable and justifiable reliance on the representations of Kao." The Suns argue that their claims do not relate to the Share Purchase Agreements because they are challenging fraudulent conduct that occurred before the agreements were executed by the parties. This argument is belied by the Suns' complaint itself, which alleges that Kao is liable under the WSSA as a seller of securities (or as a person controlling such a seller), which occurred when the Suns entered into the agreements. Because the Suns' dispute is logically connected to the parties' agreements, it is subject...