Court: District Court, E.D. California; March 29, 2019; Federal District Court
A motion to dismiss was filed by defendant Fortafy Games DMCC concerning the complaint from plaintiffs Color Switch Productions, Inc. and Color Switch LLC, based on a forum selection clause in a prior publishing agreement. A hearing took place on July 17, 2018, with attorneys representing both sides. The court decided to grant Fortafy’s motion to dismiss without allowing amendments.
Color Switch, a technology company from Bakersfield, California, developed the popular mobile game Color Switch in 2015. The game's developer, David Reichelt, entered a publishing agreement with EyeBoxGames FZE on November 21, 2015, which included a forum selection clause specifying that disputes would be governed by UAE law and settled in Dubai. Under this agreement, profits were to be shared equally until renegotiated in January 2016, resulting in an amended agreement that favored EyeBoxGames with an eighty percent profit share and removed profit rights for Reichelt and his partner Aditya Oza concerning updates made by EyeBoxGames. The forum selection clause remained unchanged.
Fortafy was incorporated in the UAE in April 2016. On June 16, 2016, the amended agreement was terminated, and Color Switch entered a new publishing agreement with Fortafy, allowing Color Switch to retain its intellectual property rights and providing an option to terminate the agreement after eighteen months.
Color Switch claims that under the publishing agreement, Fortafy was to work as a "work for hire," meaning any work produced would belong to Color Switch. However, the agreement specifies that Color Switch has no rights to updates made by Fortafy and maintains an 80% profit share for Fortafy. Color Switch terminated the agreement effective December 15, 2017, requesting the return of its intellectual property licensed to Fortafy. While Fortafy acknowledged the termination, it de-published the game but refused to provide the latest version or transfer it to Color Switch's developer account, allegedly hindering Color Switch's ability to publish the game. Color Switch has brought four claims against Fortafy: copyright infringement, a request for a declaratory judgment, breach of contract, and conversion. They seek various forms of relief, including compensatory and treble damages. Fortafy filed a motion to dismiss based on the forum selection clause in the agreement. The court allowed further submissions from both parties on this motion, and Fortafy later requested judicial notice of related litigation in Dubai and Color Switch's trademark application in the UAE. A motion to dismiss based on a forum selection clause is governed by Federal Rule of Civil Procedure 12(b)(3), allowing the court to consider facts beyond the pleadings.
In a Rule 12(b)(3) motion concerning a forum selection clause, the trial court must favor the non-moving party and resolve factual conflicts in their favor. Interpretation and enforcement of such clauses are procedural matters governed by federal law. The doctrine of forum non conveniens is the appropriate method for enforcing a forum-selection clause pointing to a state or foreign forum. Forum selection clauses are generally presumed valid unless compelling reasons suggest otherwise, placing a heavy burden of proof on the party challenging the clause. There are three grounds for challenging the enforcement of a forum selection clause: 1) if it stems from fraud or overreaching; 2) if enforcement would deny the party their day in court; and 3) if it contradicts a strong public policy of the forum. If a clause is deemed valid, the court must weigh public interest factors, such as court congestion and local interests, without considering private interest factors. Fortafy argues for dismissal based on the validity of the forum selection clause and the favorability of public interest factors. Conversely, Color Switch contends that the clause does not apply to its claims and is unenforceable, arguing that both private and public interest factors oppose enforcement.
The applicability of the Forum Selection Clause to Color Switch's copyright and declaratory relief claims must be established before conducting a forum non conveniens analysis. Although the Ninth Circuit has not specifically addressed the inclusion of copyright claims under such clauses, it has recognized that these clauses can apply to tort claims if resolving those claims necessitates interpreting a contract featuring the clause. District courts in the Ninth Circuit have determined that copyright infringement claims requiring interpretation of an underlying contract with a forum selection clause may fall under that clause's scope. Color Switch argues against this application by claiming that U.S. district courts have exclusive jurisdiction over its copyright and declaratory judgment claims, citing 28 U.S.C. 1338(b) and 28 U.S.C. 2201. However, the Ninth Circuit has clarified that 28 U.S.C. 1338(b) does not prevent foreign courts from applying U.S. copyright law, and the exclusivity pertains only to state courts, not to foreign jurisdictions. Moreover, Color Switch’s declaratory relief claim, which seeks a declaration of exclusive copyright over its game, is derivative of the copyright claim and thus also falls within the scope of the forum selection clause.
Claims for declaratory relief are not excluded from a forum-selection clause simply because they are equitable in nature, as established in Glob. Quality Foods, Inc. v. Van Hoekelen Greenhouses, Inc. The forum selection clause in question expressly covers "any dispute arising in connection with this Agreement," which includes the equitable relief sought by Color Switch. Even if equitable relief were exempt, it is uncertain whether a plaintiff could circumvent the clause by framing claims as equitable. The court found that Color Switch's declaratory relief claim mirrors its claims for indemnification and breach of contract, thus falling within the clause’s scope.
Color Switch's request for the court to adopt the Second Circuit's approach regarding copyright claims and forum selection clauses is misplaced. While the Second Circuit’s rulings in Phillips v. Audio Active Ltd. and Corcovado Music Corp. v. Hollis Music, Inc. suggest that copyright disputes may not arise under a contract if the plaintiff denies the contract's relevance, district courts in this circuit have rejected this interpretation. Color Switch has indeed asserted rights under the publishing agreement that includes the forum selection clause. The court will apply the Manetti-Farrow framework to assess whether resolving Color Switch's copyright and declaratory relief claims necessitates interpreting the publishing agreement. Color Switch contends that its copyright claim does not require such analysis, citing that its copyright predates the agreement and is based on its authorship and creation of the game.
The court finds Color Switch's copyright claims unpersuasive, emphasizing that the claims assert Fortafy’s work on the game was done as "work-for-hire" within the employment scope for Color Switch. To support this claim, Color Switch must provide evidence of an express written agreement confirming the "work-for-hire" status, as outlined in 17 U.S.C. § 101. Consequently, an analysis of the publishing agreement is essential to determine the legitimacy of this claim.
Color Switch attempts to differentiate between two copyright theories: one based on the "work-for-hire" doctrine and another relying on derivative works, claiming the latter does not involve contract interpretation. However, the court states that Color Switch cannot avoid the implications of its chosen claims, which necessitate contract interpretation. Additionally, even the derivative work theory still requires examining the publishing agreement.
The agreement indicates that Fortafy was responsible for developing updates to the game, and Color Switch does not hold rights to those updates. While Color Switch claims to retain all copyrights related to the game, this assertion does not negate the need for contract interpretation; rather, it reinforces the necessity to analyze the agreement's terms to ascertain rights and obligations between the parties.
Ultimately, the court determines that resolving Color Switch’s copyright claims is inherently linked to the publishing agreement, and the claims fall within the purview of the agreement’s forum selection clause.
The validity of the forum selection clause in the publishing agreement is under scrutiny. Such clauses are generally considered valid and enforceable unless the opposing party demonstrates that enforcement would be "unreasonable" in the circumstances. The burden of proof lies heavily on the party challenging the clause, which must provide clear evidence of unreasonableness, injustice, or invalidity due to factors like fraud or coercion.
Color Switch contends that the clause is unenforceable based on three claims: 1) it arose from fraud, coercion, and overreaching; 2) enforcement would deny it its right to a fair trial; and 3) public policy favors enforcing the Copyright Act. Specifically, Color Switch argues that the original and amended agreements were negotiated without proper representation, that the parties were in financial distress, and that undue pressure was applied during negotiations. Allegations include threats from Fortafy’s attorney, asserting that the terms were non-negotiable and warning of severe consequences if Color Switch did not comply.
However, the court finds that these allegations do not substantiate claims of fraud, coercion, or overreaching related to the forum selection clause. Color Switch has not provided legal support for its claims against Fortafy’s conduct. Moreover, concerns about bargaining power in earlier negotiations are irrelevant since Color Switch had legal representation during the final agreement negotiations. The precedent set in Burger King Corp v. Rudzewicz affirms that being represented by counsel undermines claims of overreaching in bargaining. Thus, the forum selection clause remains valid.
A forum selection clause is enforceable even with unequal bargaining power, provided it is reasonably communicated to the parties. In this case, Color Switch did not claim that the clause was inadequately communicated. To invalidate a forum selection clause based on fraud, a party must demonstrate that it was included due to fraud or coercion. Color Switch's vague assertions of economic pressure and undue influence were insufficient to meet this burden, leading the court to uphold the clause as free from fraud or coercion.
Color Switch argued that enforcing the clause would deny it access to the courts, particularly for claims under the Copyright Act and the Declaratory Judgment Act, citing limited damages and lack of injunctive relief under UAE law. However, the court found that Color Switch had waived its right to litigate in a U.S. district court by agreeing to the exclusive jurisdiction of the Court of Dubai for disputes arising from the publishing agreement. The mere presence of less favorable legal protections in UAE does not equate to a deprivation of due process. A party is not entitled to identical legal recourse in a foreign forum for the enforcement of a forum selection clause to be deemed reasonable.
Additionally, the claims arise from the publishing agreement, reinforcing the waiver of rights to U.S. courts. Finally, the declaration from attorney Omar Obeidat indicated that copyright cases in the UAE are largely straightforward applications of anti-piracy laws, contradicting Color Switch's claim of being deprived of its day in court.
The forum non conveniens doctrine does not require that the alternative forum's remedies match those of the initial forum; rather, the critical inquiry is whether the alternative forum's remedies are so inadequate that they effectively deny relief. Color Switch has not demonstrated that UAE law would be inadequate to provide reasonable recourse, nor that enforcing the forum-selection clause would deny it its day in court. UAE law recognizes copyright actions, and the court has determined that Color Switch's copyright claims are tied to a publishing agreement, which UAE courts are capable of adjudicating, as evidenced by the current litigation in Dubai. The Court of Dubai is actively engaged in resolving disputes between the parties and has appointed experts specializing in intellectual property to evaluate the contractual relationship and the value of the intellectual property rights involved.
Furthermore, Color Switch has failed to show that the Court of Dubai would be unable to apply U.S. copyright law, as the attorney's declaration indicates that the court would apply UAE law unless certain conditions are met. While the court must favor the non-moving party on factual disputes, it sees no such disputes here, as Color Switch has not identified any barriers to the application of U.S. law in Dubai. Ultimately, the enforcement of the forum selection clause does not deny Color Switch access to justice.
Regarding public policy, Color Switch claims that enforcing the forum-selection clause would contravene U.S. copyright laws. However, as established by the Ninth Circuit, federal copyright laws aim to protect the rights of copyright owners rather than serve consumer interests, indicating that the primary concerns of the dispute rest with the parties involved, not the broader American public.
The parties agreed to resolve disputes from the publishing agreement in the Court of Dubai, and Color Switch cannot now challenge this by claiming inadequate protection of its interests abroad. Any inconvenience from litigating in Dubai was foreseeable at the time of contracting. The court finds that enforcing the forum selection clause aligns with U.S. public policy and that none of the Supreme Court's Bremen exceptions for unenforceability apply. Public interest factors favor enforcement, as there are no congestion issues in Dubai's courts, while the Eastern District of California faces significant caseload challenges. Although Color Switch argues for U.S. interest due to its copyright status, Fortafy is incorporated in the UAE, and Color Switch agreed to litigate under UAE law. The potential limitation on Color Switch's rights under U.S. copyright law was foreseeable upon entering the agreement. Thus, the public interest factors support enforcing the forum selection clause. Additionally, the court concludes that allowing Color Switch to amend its pleadings would be futile and no evidentiary hearing is necessary, adhering to the principle that leave to amend is to be granted unless it cannot be cured by additional facts.
Factors to consider in a motion for leave to amend include bad faith, undue delay, prejudice to the opposing party, futility of the amendment, and prior amendments by the party (Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995)). Futility alone can justify denial (Nunes, 375 F.3d at 808). A tenuous legal basis for a cause of action supports refusal to grant leave (Lockheed Martin Corp. v. Network Sols. Inc., 194 F.3d 980, 986 (9th Cir. 1999)). The court determined it would be futile to grant Color Switch leave to amend since their sur-reply did not present new facts or evidence regarding alleged fraud or coercion associated with a forum selection clause in their publishing agreement. Color Switch's counsel claimed they could provide additional witnesses and evidence but failed to substantiate these claims in the sur-reply (Doc. No. 22). Consequently, the court concluded there were no genuine factual disputes to resolve, denying Color Switch's requests for an evidentiary hearing and limited discovery. The court granted the defendants' motion to dismiss without leave to amend, directing the Clerk to close the case. The court also noted that it could rely on facts outside of the complaint because the motion to dismiss was based on the enforcement of a forum selection clause, governed by Federal Rule of Civil Procedure 12(b)(3) (Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996)).
A motion under Rule 12(b)(3) allows the court to consider facts beyond the pleadings, unlike a Rule 12(b)(6) motion. Color Switch argues that previous cases are not analogous because dismissals in those instances merely meant a shift to another federal judge, not a transfer to a foreign court, raising concerns about the potential extinguishment of its Copyright Act claim and declaratory judgment. However, these concerns should be analyzed later in the forum non conveniens context. If the forum selection clause is deemed valid, Color Switch can argue that enforcing it may hinder its access to the courts. Despite being allowed to present additional evidence of fraud or coercion related to the publishing agreement, Color Switch did not provide new allegations or documents substantiating its claims. Notably, the forum selection clause was clearly communicated, as evidenced by Reichelt’s signature beneath it. Fortafy requested the court to recognize certain court documents from ongoing litigation in Dubai and Color Switch's trademark application in the UAE, which the court granted under Federal Rule of Evidence 201(b). The court acknowledged these documents solely for their filing status, not for the truth of their contents.
