Pennsylvania and New York Choice of Law Clauses: What Happens When California Sues Anyway?
- Todd Nurick
- 1 day ago
- 16 min read
A contract between businesses in different states often contains familiar language: Pennsylvania law governs. The parties consent to jurisdiction in Pennsylvania. Any lawsuit must be filed in a particular Pennsylvania court.
Or the contract may say the same thing about New York.
Everyone signs.
Then a dispute arises, and the California party files suit in California.
What happened to the contract?
The answer is more complicated than simply saying that California "doesn't honor" out-of-state choice-of-law or forum-selection provisions. California courts routinely enforce those provisions in appropriate commercial cases. But California also has some unusually strong statutes and public policies protecting California employees, consumers, franchisees, contractors, and other parties. In those circumstances, a California court may refuse to enforce part or all of the parties' contractual choice.
That can produce an unusual situation: a contract says the dispute belongs in Pennsylvania, one party nevertheless sues in California, and the Pennsylvania party must decide whether to fight over forum in California, assert counterclaims there, file its own affirmative action in Pennsylvania, or pursue some combination of those strategies.
The distinction matters because choice of law, personal jurisdiction, venue, and forum selection are four different legal concepts. A contract should address each intentionally.
Choice of Law, Jurisdiction, Venue, and Forum Are Not the Same Thing
Contract language is sometimes drafted as though these concepts are interchangeable. They are not.
A choice-of-law provision identifies the substantive law the parties want applied to their contract. If the agreement says Pennsylvania law governs, that ordinarily answers questions such as contract interpretation, performance, breach, and remedies.
A consent-to-jurisdiction provision addresses the court's power over the parties. A California company can, for example, contractually consent to personal jurisdiction in Pennsylvania even though it has no offices there.
A venue provision identifies the geographic location in which suit may or must proceed, such as Montgomery County, Pennsylvania.
A forum-selection clause identifies the particular court or courts in which the parties have agreed to litigate. A provision may be permissive, allowing litigation in a designated forum, or mandatory, requiring litigation there exclusively.
These distinctions have real consequences. An agreement stating only that "Pennsylvania law governs" does not necessarily require litigation in Pennsylvania. A California court could potentially apply Pennsylvania substantive law while the lawsuit remains in California.
Conversely, parties can agree that litigation must occur in Pennsylvania while also specifying which state's substantive law will govern the dispute.
The safest commercial drafting generally addresses all four issues separately and expressly.
How Pennsylvania and New York Choice of Law Clauses Actually Work
Pennsylvania and New York Choice of Law Clauses Need More Than "Governing Law"
Pennsylvania generally respects commercial choice-of-law provisions. The United States Court of Appeals for the Third Circuit, applying Pennsylvania conflicts principles in Kruzits v. Okuma Machine Tool, Inc., recognized Pennsylvania's adoption of Section 187 of the Restatement (Second) of Conflict of Laws. Under that framework, the parties' selected law will ordinarily control if the chosen state has a substantial relationship to the parties or transaction, or another reasonable basis exists for the selection.
There are limits. A contractual choice may fail where applying the chosen law would violate a fundamental policy of another state that has a materially greater interest in the particular issue.
Pennsylvania is likewise receptive to forum-selection provisions. In Central Contracting Co. v. C.E. Youngdahl & Co., and subsequent decisions applying it, Pennsylvania courts have treated freely negotiated forum-selection clauses as presumptively enforceable unless enforcement would be unreasonable, the agreement resulted from fraud or overreaching, or enforcement would violate public policy.
Mere inconvenience or the additional expense of litigating away from home generally is not enough.
Pennsylvania courts also recognize contractual consent to personal jurisdiction. In Patriot Commercial Leasing Co. v. Kremer Restaurant Enterprises, LLC, for example, an agreement required litigation in state or federal court within or for Montgomery County, Pennsylvania and contained an express consent to jurisdiction and venue. The Superior Court enforced the provision against out-of-state parties.
That is why a well-drafted provision should not stop at "Pennsylvania law governs." It should separately state where litigation must be filed, establish consent to personal jurisdiction, identify venue, and make clear whether the selected forum is exclusive.
New York Offers an Additional Statutory Advantage for Major Commercial Contracts
New York goes further than most states by expressly encouraging parties to choose New York law and New York courts for substantial commercial transactions.
New York General Obligations Law § 5-1401 generally permits parties to a contract involving at least $250,000 to select New York law even if the contract otherwise lacks a reasonable relationship to New York, subject to statutory exceptions.
For qualifying transactions involving at least $1 million, General Obligations Law § 5-1402 can also facilitate access to New York courts when the contract selects New York law and contains the necessary consent to New York jurisdiction.
The New York Court of Appeals has strongly enforced these policies. In IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., the Court held that where § 5-1401 applies and the parties expressly selected New York law, courts should not conduct an ordinary conflicts-of-law analysis that would undermine their contractual choice.
New York Civil Practice Law and Rules § 501 also specifically recognizes written agreements fixing the place of trial, subject to statutory limitations.
But New York's contractual freedom is not unlimited either. New York itself has statutes invalidating certain out-of-state law or forum provisions, including provisions in specified construction contracts. California therefore does not have a monopoly on overriding contractual forum selection in areas where a legislature has determined that important local interests require protection.
California Does Not Automatically Reject Pennsylvania or New York Forum Clauses
This is an important point.
California's highest court has itself enforced a contract requiring litigation in Pennsylvania.
In Smith, Valentino & Smith, Inc. v. Superior Court, the California Supreme Court considered an agreement containing a Pennsylvania forum-selection provision. The California plaintiff sued at home notwithstanding the agreement. The Supreme Court concluded that the clause should be enforced and permitted the dispute to proceed in the contractually selected Pennsylvania forum.
That is difficult to reconcile with any blanket proposition that California courts simply refuse to honor foreign forum-selection clauses. They do not.
California's choice-of-law doctrine is similarly nuanced. In Nedlloyd Lines B.V. v. Superior Court, the California Supreme Court adopted an approach derived from Restatement Section 187. A contractual choice normally will be honored when the selected jurisdiction has a substantial relationship to the parties or transaction or there is another reasonable basis for the choice.
The difficult question comes next: would application of the chosen law conflict with a fundamental California policy, and, if so, does California have a materially greater interest in determining the issue?
For an ordinary negotiated business-to-business agreement, a Pennsylvania or New York clause therefore may be quite strong.
The analysis changes significantly when the contract touches a California statute or right California treats as nonwaivable.
When California May Refuse the Parties' Contractual Choice
California has developed several significant exceptions.
California Employment Agreements
California Labor Code § 925 is one of the clearest examples.
Subject to an important exception, an employer generally may not require an employee who primarily resides and works in California, as a condition of employment, to agree to:
adjudicate outside California a claim arising in California; or
give up the substantive protections of California law concerning a controversy arising in California.
A conflicting provision is voidable by the employee. If properly voided, the dispute is to be adjudicated in California under California law, and the statute permits an award of reasonable attorneys' fees to an employee enforcing the statute.
There is a significant negotiated-contract exception where the employee was in fact individually represented by counsel in negotiating the forum, venue, or choice-of-law provision.
California courts have also scrutinized foreign forum clauses where their enforcement could impair nonwaivable California wage rights. Verdugo v. Alliantgroup, L.P. is an example.
Consumer Protection
In America Online, Inc. v. Superior Court, a California appellate court refused to enforce Virginia forum and choice-of-law provisions where doing so would effectively diminish protections available under California's Consumer Legal Remedies Act.
The issue was not simply that Virginia was inconvenient. The concern was that enforcing the contractual provisions could operate as a waiver of substantive California statutory rights.
Jury Trial Rights
In Handoush v. Lease Finance Group, LLC, California refused to enforce a New York forum-selection provision where the combined effect of the New York forum and New York law could enforce a predispute contractual jury waiver that California public policy would not permit.
Again, the critical issue was not hostility toward New York. It was California's treatment of a particular right as fundamental.
California Franchise Agreements
California Business and Professions Code § 20040.5 provides that a franchise agreement provision restricting venue to a forum outside California is void for claims relating to a franchise business operating within California.
Certain California Construction Contracts
California Code of Civil Procedure § 410.42 invalidates specified provisions requiring certain California construction disputes to be litigated, arbitrated, or otherwise determined outside California.
Pennsylvania and New York have their own construction-contract statutes limiting the ability to send local construction disputes elsewhere. The broader lesson is therefore not that California disrespects contracts. It is that contractual freedom exists against a background of mandatory state statutes and fundamental public policy.
Restrictive Covenants
California's strong statutory policy concerning restraints on lawful professions, trades, and businesses has likewise caused courts to reject another state's law where applying that law would undermine California's policy. Application Group, Inc. v. Hunter Group, Inc. is a prominent example.
This is particularly important when a contract combines a foreign choice-of-law clause with noncompetition or related post-employment restrictions.
Can You File a New Pennsylvania Lawsuit Instead of Counterclaiming in California?
This is where the issue becomes particularly interesting.
Assume a commercial agreement provides that Pennsylvania law governs and that all litigation must be filed exclusively in Pennsylvania. The California party nevertheless files suit in California.
Must the Pennsylvania party accept California as the battleground and assert all of its affirmative claims as counterclaims there?
Not necessarily. But filing a new Pennsylvania action is not a universal escape hatch.
Pennsylvania Makes Counterclaims Permissive
Pennsylvania Rule of Civil Procedure 1031 says that a defendant "may" assert a counterclaim against the plaintiff. Pennsylvania does not generally use the federal compulsory-counterclaim model.
The Pennsylvania Superior Court addressed the practical significance of that rule in Davis Cookie Co. v. Wasley.
The parties had competing claims arising from the same contractual relationship. One sued first in Luzerne County. The defendant did not assert its affirmative contract claim as a counterclaim. It instead commenced a separate action in Clarion County.
The Superior Court held that Pennsylvania's permissive-counterclaim rule allowed the second action. It explained that a Pennsylvania defendant may reserve a counterclaim and pursue it independently in a court possessing proper venue and subject-matter jurisdiction.
The court also recognized the obvious potential for duplication. A court can potentially hold one proceeding in abeyance, and if both proceed, the first case reaching a final judgment may create res judicata or collateral-estoppel consequences in the other.
That principle is important to a Pennsylvania party confronted with an out-of-state lawsuit.
But it answers only the Pennsylvania side of the equation.
California Has a Different Rule
California Code of Civil Procedure § 426.30 generally requires a defendant who has been served with a complaint to plead a "related cause of action" against the plaintiff by cross-complaint if that cause of action exists when the defendant serves its answer.
Failure to do so can prevent the defendant from later asserting the related claim in another action.
That is dramatically different from Pennsylvania Rule 1031.
Consequently, the fact that Pennsylvania would allow a separate affirmative action does not necessarily mean the party can safely omit the claim from an existing California case.
The procedural law of the California proceeding must be analyzed independently.
A California appellate court's decision in LGCY Power, LLC v. Superior Court illustrates how complicated this can become. That case involved competing Utah and California litigation and the interaction between California Labor Code § 925, California's compulsory cross-complaint rule, and the Full Faith and Credit Clause. The court held that § 925 supplied an exception allowing the California employee's claims to proceed in California despite the pending Utah litigation.
The court also recognized a broader reality of interstate litigation: two state proceedings can sometimes continue simultaneously until one produces a judgment capable of having preclusive effect in the other.
Filing in Pennsylvania Does Not Mean the California Case Can Be Ignored
This is probably the most important practical limitation.
Suppose the Pennsylvania defendant believes the California lawsuit violates an exclusive Pennsylvania forum-selection clause and immediately files its own action in Pennsylvania.
That may be strategically useful.
The Pennsylvania complaint might assert the underlying contract claim, seek declaratory relief concerning the parties' contractual obligations and forum agreement, and, where legally supportable, seek remedies resulting from the opposing party's failure to honor the contract.
But merely filing the Pennsylvania action ordinarily does not make the California complaint disappear.
The defendant must still protect its rights in California. That may require a timely motion to dismiss, stay, transfer, compel enforcement of the forum provision, or otherwise contest the California proceeding. Failure to respond can create default and waiver problems wholly apart from the merits of the Pennsylvania action.
Accordingly, a parallel Pennsylvania filing may reduce the extent to which a party wants to litigate its affirmative case in California. It cannot safely be treated as an automatic substitute for responding to the California action.
A California Federal Case Creates an Additional Problem
If the California lawsuit is in federal court, Federal Rule of Civil Procedure 13(a) applies.
Unlike Pennsylvania's permissive Rule 1031, Rule 13(a) generally makes a claim compulsory if, when the responsive pleading is served, the claim arises out of the same transaction or occurrence as the opposing party's claim and does not require the addition of a party beyond the court's jurisdiction.
That can make the "I'll sue separately in Pennsylvania instead" strategy substantially more dangerous.
Rule 13(a) contains an exception where, when the action was commenced, the claim was already the subject of another pending action. Filing a Pennsylvania case only after the California federal action began does not fit comfortably within that exception.
The federal forum-selection analysis also implicates Atlantic Marine Construction Co. v. United States District Court. The United States Supreme Court held that a valid forum-selection clause should ordinarily be given controlling weight in all but exceptional circumstances, with the procedural mechanism depending in part on whether the contractual forum is another federal court or a state or foreign forum.
That often makes enforcement of the forum clause itself the cleaner first battle in federal litigation.
Parallel Pennsylvania and California Lawsuits Can Exist
The mere existence of the California case does not invariably deprive a Pennsylvania court of power to adjudicate an otherwise proper Pennsylvania action.
State courts are separate sovereign judicial systems. Parallel litigation can therefore occur.
The California Supreme Court acknowledged that possibility in Advanced Bionics Corp. v. Medtronic, Inc., a dispute involving parallel California and Minnesota proceedings. The court emphasized principles of interstate comity and judicial restraint rather than recognizing an automatic rule under which whichever party filed first gained exclusive control over the controversy.
Likewise, LGCY Power expressly recognized that parallel sister-state proceedings may result in one case reaching judgment first and the resulting judgment then being asserted as res judicata in the other.
That "race to judgment" is precisely why parallel litigation can be strategically powerful but procedurally dangerous.
A party considering a separate Pennsylvania action therefore has to evaluate not only whether Pennsylvania will accept the complaint, but also:
whether the Pennsylvania forum-selection clause is mandatory and sufficiently broad;
whether the Pennsylvania court has subject-matter jurisdiction;
whether the other party validly consented to Pennsylvania personal jurisdiction;
whether the California claims fall within the scope of the clause;
whether a California statute or fundamental public policy arguably overrides the clause;
whether California's compulsory cross-complaint rules apply;
whether the California case is state or federal;
whether either court is likely to stay its proceeding in deference to the other; and
what happens if one action reaches a final judgment first.
The forum clause is therefore part of litigation strategy, not a substitute for litigation strategy.
Is Filing in the Wrong Forum Itself a Breach of Contract?
Another intriguing question is whether a party that expressly promised to litigate only in Pennsylvania or New York breaches the contract by suing somewhere else.
New York has authority supporting such a theory.
In Wormser Corp. v. L'Oréal USA, Inc., the Appellate Division, First Department, permitted a claim seeking damages resulting from alleged breach of a New York forum-selection clause. The court expressly recognized that damages may be available for breach of a forum-selection provision and that such recovery does not automatically violate the American Rule concerning attorneys' fees.
That creates an important drafting consideration for New York contracts.
Pennsylvania is less clear. I have not identified a controlling Pennsylvania appellate decision squarely adopting the Wormser rule and authorizing attorneys' fees as damages merely because a party sued outside an agreed Pennsylvania forum.
That distinction matters. A Pennsylvania plaintiff should not assume that all expenses incurred opposing an out-of-state action will automatically become recoverable contract damages.
The contract itself can improve the position substantially by expressly addressing the cost of enforcing its forum-selection, jurisdiction, and venue provisions, including attorneys' fees where legally permissible.
Drafting Clauses That Actually Travel
The attached Lexis research reinforces a recurring drafting problem: a traditional one-sentence governing-law provision may be perfectly adequate to choose substantive law while doing almost nothing to answer the more important procedural questions once litigation starts.
For an interstate commercial agreement, counsel should consider separate provisions addressing at least the following concepts.
Governing law. Identify the selected state's substantive law and state whether its conflict-of-laws rules are excluded.
Scope. Consider whether the provision applies only to interpretation of the agreement or more broadly to claims "arising out of or relating to" the relationship, including contract, tort, statutory, and other claims to the extent legally permissible.
Exclusive forum. If exclusivity is intended, say so. "May be brought" and "shall be brought exclusively" do not mean the same thing.
Consent to personal jurisdiction. State expressly that each party irrevocably submits to the personal jurisdiction of the selected courts.
Venue. Identify the county and, where appropriate, the state and federal courts contemplated by the agreement.
Forum non conveniens and similar objections. Consider a knowing waiver of objections to the selected forum based on inconvenience or improper venue, subject to applicable law.
Enforcement expenses. If the business deal supports it, consider an express contractual remedy for reasonable expenses and attorneys' fees incurred enforcing the forum, jurisdiction, or venue agreement.
Statutory carveouts. Determine whether the parties' relationship falls within an employment, franchise, construction, consumer, insurance, restrictive-covenant, or other statutory regime limiting contractual forum or law selection.
Consistency. Make sure the governing-law clause, forum-selection clause, arbitration provision, jury-waiver provision, and dispute-resolution procedures do not contradict one another.
A strong choice-of-law clause cannot repair a weak forum clause after litigation has begun.
A Practical Example
Consider a Pennsylvania software company contracting with a sophisticated California corporation.
The agreement states that Pennsylvania law governs, that the parties irrevocably consent to personal jurisdiction in Pennsylvania, and that any action arising out of or relating to the agreement shall be brought exclusively in the Court of Common Pleas of Montgomery County, Pennsylvania or, if federal subject-matter jurisdiction exists, the United States District Court for the Eastern District of Pennsylvania.
The California corporation signs the agreement and later files an ordinary breach-of-contract action in California.
If no special California statute or fundamental policy applies, the Pennsylvania company's position is materially stronger than it would be under a generic sentence merely stating that Pennsylvania law governs. California's own Smith, Valentino decision demonstrates that California courts can and do enforce a Pennsylvania forum agreement.
The Pennsylvania company might seek prompt enforcement of the clause in California while also evaluating whether an affirmative Pennsylvania action is appropriate.
Now change one fact.
Assume the contract is an employment agreement with a California employee covered by Labor Code § 925.
The same Pennsylvania forum provision may be voidable, and the employee may have a statutory right to adjudication in California under California substantive law.
The words of the contract did not change. The legal regime surrounding those words did.
That is the central lesson.
The Bottom Line
Pennsylvania and New York choice of law clauses remain valuable tools in interstate contracting, but they should never be confused with jurisdiction or forum-selection provisions.
For ordinary sophisticated commercial transactions, Pennsylvania and New York courts generally respect contractual choice, and California courts do not categorically reject those agreements. California itself has enforced a Pennsylvania forum-selection clause.
The harder cases arise where another jurisdiction treats a particular substantive right or statutory protection as nonwaivable.
And when litigation has already begun in California, an exclusive Pennsylvania forum provision presents an additional strategic possibility: filing an affirmative Pennsylvania action rather than automatically surrendering every affirmative claim to a California counterclaim.
Pennsylvania's permissive-counterclaim regime provides meaningful support for the idea that a defendant can reserve its own affirmative claims for a separate, proper forum. But that is only one half of the analysis. California state law may make related cross-claims compulsory, federal Rule 13(a) can do the same in federal court, parallel proceedings can be stayed, and the first final judgment may have preclusive consequences elsewhere.
The most effective forum-selection strategy therefore begins years earlier, when the contract is drafted.
A contract should say not merely which law applies, but which courts have jurisdiction, where venue lies, whether that forum is exclusive, what claims the clause covers, and what happens when a party disregards the agreement.
Those additional sentences may eventually determine not just which law governs a lawsuit, but where the lawsuit happens at all.
Frequently Asked Questions
Does a Pennsylvania choice-of-law clause require a lawsuit to be filed in Pennsylvania?
No. A choice-of-law provision selects the law governing the dispute. A separate forum-selection provision is ordinarily needed to require litigation in Pennsylvania.
Can a California court refuse to enforce a Pennsylvania or New York forum-selection clause?
Yes, in some circumstances, particularly where enforcement would violate a California statute or fundamental public policy. But California does not categorically reject such provisions. Its Supreme Court has enforced a Pennsylvania forum-selection agreement in an ordinary commercial dispute.
Can an out-of-state party consent to personal jurisdiction in Pennsylvania by contract?
Generally, yes. Properly drafted commercial forum-selection and jurisdiction provisions can constitute consent to personal jurisdiction, subject to defenses such as fraud, overreaching, statutory restrictions, or serious public-policy concerns.
Can a Pennsylvania defendant file its own Pennsylvania lawsuit instead of asserting a counterclaim in California?
Sometimes. Pennsylvania generally treats counterclaims as permissive. But the California proceeding has its own procedural rules. California state law can require related cross-claims, and Federal Rule 13(a) generally makes transactionally related counterclaims compulsory in federal court. A separate Pennsylvania filing should therefore be evaluated before any responsive pleading is served and with the procedural rules of both cases in view.
Does the first lawsuit filed automatically control?
No. Sister-state courts can sometimes exercise concurrent jurisdiction, producing parallel proceedings. Courts may use stays, forum-selection principles, comity, preclusion, and other doctrines to manage the conflict. A final judgment in one action may eventually affect or bar some or all of the other proceeding.
Can attorneys' fees be recovered when a party violates a forum-selection clause?
New York authority recognizes that damages may be available for breach of a forum-selection clause, including in appropriate circumstances litigation expenses. Pennsylvania law is less clearly developed on that precise theory. Express contractual language concerning enforcement expenses can materially improve the argument, subject to applicable law.
Sources
Kruzits v. Okuma Machine Tool, Inc., 40 F.3d 52 (3d Cir. 1994). Public opinion
Patriot Commercial Leasing Co. v. Kremer Restaurant Enterprises, LLC, 915 A.2d 647 (Pa. Super. Ct. 2006). Public opinion
Davis Cookie Co. v. Wasley, 389 Pa. Super. 112, 566 A.2d 870 (1989). Public opinion
Pennsylvania Rule of Civil Procedure 1031. Pennsylvania Code
New York General Obligations Law § 5-1401. New York State Senate
New York General Obligations Law § 5-1402. New York State Senate
New York CPLR § 501. New York State Senate
IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., 20 N.Y.3d 310 (2012). Public opinion
Wormser Corp. v. L'Oréal USA, Inc., 205 A.D.3d 496 (1st Dep't 2022). New York Courts opinion
Smith, Valentino & Smith, Inc. v. Superior Court, 17 Cal. 3d 491 (1976). Public opinion
Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459 (1992). Public opinion
California Labor Code § 925. California Legislature
California Code of Civil Procedure § 410.42. California Legislature
California Business and Professions Code § 20040.5. California Legislature
LGCY Power, LLC v. Superior Court (Cal. Ct. App. 2022). Public opinion
Atlantic Marine Construction Co. v. United States District Court, 571 U.S. 49 (2013). Public opinion
This article is for general informational purposes only and does not constitute legal advice. Laws governing choice-of-law provisions, forum-selection provisions, jurisdiction, venue, and interstate litigation vary according to the parties, contract, claims, and jurisdictions involved. Reading this article does not create an attorney-client relationship. Businesses facing an actual dispute should consult counsel concerning the specific agreement and jurisdictions involved.
About Todd B. Nurick
Todd B. Nurick is a Pennsylvania and New York business attorney and Fractional General Counsel/Outside General Counsel with approximately 30 years of experience advising businesses on contracts, transactions, risk management, disputes, and litigation strategy. Through the Law Office of Todd B. Nurick, he works with businesses seeking experienced outside legal counsel without the cost or structure of a full-time in-house legal department.
To learn more about business contracts, interstate agreements, or Fractional General Counsel/Outside General Counsel services, visit the Law Office of Todd B. Nurick.
