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Warning from the U.S. Supreme Court: In Contracts, Preselect Your Forum Carefully

Ellis Winters

Ellis & Winters

Stephen D. Feldman

By: Stephen Feldman and Erin Blondel

In commercial contracts, forum-selection clauses have become ubiquitous. Those clauses, after all, bring certainty.

When litigation actually ensues, however, a party might regret agreeing to the forum in the clause. Imagine if that litigant files suit in a different forum. Can the other party enforce the clause and move the case to the proper forum? 

The U.S. Supreme Court finally settled that question, at least for federal purposes, in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 134 S. Ct. 568 (2013). The Supreme Court instructed lower courts to enforce the chosen forum “unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transaction.” 134 S. Ct. at 575.

Companies hoping to limit uncertainty in litigation now have a stronger friend in federal courts than ever before. Simply put, Atlantic Marine’s standard makes forum-selection clauses very difficult for a party to the contract to avoid.

In Atlantic Marine, the Supreme Court Sets Out Standards for the Enforcement of a Forum Selection Clause.

Atlantic Marine concerned a contract between Atlantic Marine (a Virginia company) and a company called J-Crew Management. J-Crew would do work for a contract between Atlantic Marine and the U.S. Army Corps of Engineers. J-Crew was a Texas corporation. The subcontract required the parties to litigate disputes in state or federal court in Norfolk, Virginia. Id. at 575-76.

Atlantic Marine and J-Crew got into a payment dispute. J-Crew then sued Atlantic Marine on J-Crew’s home turf, the Western District of Texas, invoking diversity jurisdiction. 

Atlantic Marine, in response, moved to enforce the forum-selection clause. The district court imposed on Atlantic Marine the burden to show that, under a variety of public and private factors (the forum-selection clause being just one), Virginia was a superior forum. Concluding Atlantic Marine did not make that showing, the district court refused to transfer the case, and the court of appeals affirmed. Id. at 576.

The Supreme Court granted Atlantic Marine’s certiorari petition, which asked what standard federal courts should apply when resolving motions to enforce forum-selection clauses.  Id. at 583 n.8.
The Court started with the basic premise that forum-selection clauses generally should be enforced to protect the parties’ legitimate expectations and judicial interests. Relying on this premise, the Supreme Court wrote that a valid forum-selection clause should be given “controlling weight in all but the most exceptional cases.” Id.

Having established this baseline, the Supreme Court provided three key guidelines for evaluating a motion to enforce a forum-selection clause.

First, the Court held that, when a plaintiff sues in a forum different from that in the forum-selection clause, that selection “merits no weight.” Id. at 51. Instead, that party, and not the party moving to enforce the clause, bears the burden of establishing that transfer to the selected forum is unwarranted. Id.

Second, the Supreme Court explained that any arguments about the parties’ private interests—interests which usually play a role in determining a motion to transfer venue—can not be used to justify a forum other than that selected in the clause. Id. at 582. Put another way, by agreeing to a forum-selection clause, the parties to the clause waive any challenge to the selection forum based on inconvenience. Any private-interest factors, therefore, weigh entirely in favor of the preselected forum. Id.

Third, the Court wrote that when a party like J-Crew tries to evade a forum-selection clause, the preselected forum should apply its own state’s choice-of-law rules after a transfer. That changes the normal rule that the choice-of-law regime from the transferor forum applies when a case is transferred. The Court reasoned that, in circumstances like the Atlantic Marine case, a plaintiff like J-Crew does not deserve a procedural advantage from filing in the wrong forum. Id

Key Points for Advising Your Client in view of Atlantic Marine
How, then, does Atlantic Marine affect the advice you should give your business clients?

1. Consider drafting a forum-selection clause that requires litigating in a favorable forum. If certainty in selecting a forum matters to your client, then your client’s contracts might want to include clauses that call for favorable federal forums that bear some relationship to the parties or the contractual performance. Clauses should use mandatory language such as “shall,” “must,” “exclusive,” and so on, making it clear that the parties agree that they are required to litigate in federal court. If clauses merely include “permissive” language allowing, but not requiring, litigation in the chosen forum, early court decisions suggest that Atlantic Marine might not apply. See, e.g., RELCO Locomotives, Inc. v. AllRail, Inc., 2014 WL 1047153, at *8 (S.D. Iowa Mar. 5, 2014).

Two caveats: First, if you choose the federal court in order to take advantage of Atlantic Marine’s standards, be sure it is your desired forum. In North Carolina, for example, the North Carolina Business Court provides a very favorable forum for businesses to litigate. Second, a basis for federal jurisdiction must exist for a case to be in federal court at all. A forum selection clause that requires a case to be filed in federal court does not create jurisdiction.

2. Ensure that your client can live with the preselected forum. If your client cannot select the forum, your client should know that the standard to avoid a forum-selection clause in federal court is very high. The party seeking to evade the clause must show that a transfer to the preselected forum is “unwarranted.” Id. at 581-82. To make that showing, though, the party cannot cite any inconvenience-based factors. That leaves a party to rely on public factors, such as judicial congestion and the interest in trying local disputes at home. Id.

3. Explain what will need to be shown for the clause to be unenforceableAtlantic Marine did not actually hold all forum-selection clauses enforceable. See id. Though the Court did not explain when a litigant could successfully avoid litigating in the contractual forum, the Court left a couple of clues.
First, in a footnote, the Court clarified that its “analysis presupposes a contractually valid forum-selection clause.” Id. at 581 n.5. Thus forum-evaders still can raise usual contract defenses, such as that no enforceable contract was formed or the parties entered into the contract under duress or mutual mistake.

Second, the Court left room for public-interest factors like administrative convenience or the benefits of litigating local disputes locally. See id. at 581 n.6, 582. That suggests that contracting parties should select a forum that has some common-sense relationship to at least one party. If U.S. companies choose to litigate in France, a court might well be concerned that they are needlessly burdening the French system with an American dispute. If the parties select a logical forum, however, it is hard to imagine a public interest that would negate transfer to that forum.

4. If you need to enforce a forum-selection clause, federal court might be the sounder option. Practically speaking, after Atlantic Marine, federal courts will have little choice but to enforce forum-selection clauses. Remarkably, Atlantic Marine appears friendlier to forum-selection clauses than most states, including North Carolina, and even federal admiralty law.

To understand Atlantic Marine’s impact, it is important to distinguish two different but similar legal tests: the standard for the doctrine of forum non-conveniens and the standard for enforcing forum-selection clauses.

Forum non-conveniens can apply whenever a litigant argues that private or public reasons justify litigating a case in a different forum, not just when a party is enforcing a forum-selection clause. For example, in the landmark Supreme Court decision interpreting § 28 U.S.C. 1404(a), Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981), the plaintiffs sued in California, and then in Pennsylvania, over a plane crash that occurred in Scotland killing Scottish subjects. Id. at 238-40. The defendants argued simply that Scotland was a more convenient forum. Id. at 241.

Atlantic Marine applied Piper Aircraft to forum-selection clauses, modifying it with the three key points described earlier. 134 S. Ct. at 581 & n.6.

A separate body of law, however, governs when forum-selection clauses are enforceable. Those decisions appear more willing to refuse to enforce forum-selection clauses than the Atlantic Marine Court was.

Ironically, the leading case is a Supreme Court admiralty decision, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972), which held that courts could refuse to enforce “unreasonable” or “unjust” forum-selection clauses. Unenforceable clauses include ones that “contravene a strong public policy of the forum in which suit is brought” and, in some cases, when the contractual forum would cause “serious inconvenience” to “one or both of the parties.” Id. at 15-17.

Many states, including North Carolina, have adopted the M/S Bremen standard for forum-selection-clause enforceability. Parson v. Oasis Legal Fin., LLC, 715 S.E.2d 240, 244-45 (N.C. Ct. App. 2011) (citing Perkins v. CCH Computax, Inc., 423 S.E.2d 780, 783 (1992), superseded in part by statute, N.C. Gen. Stat. § 22B-3); see also, e.g., Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1146 & n.9 (Del. 2010). 

As a result, some states have enacted statutes or issued judicial decisions prohibiting some kinds of forum-selection clauses. In North Carolina, for example, “North Carolina contracts,” which courts have defined to mean contracts formed in North Carolina, cannot adopt another state’s forum. N.C. Gen. Stat. § 22B-3; see Szymczyk v. Signs Now Corp., 606 S.E.2d 728, 733 (N.C. Ct. App. 2005).

And many states (though not North Carolina) expressly permit courts to consider whether the chosen forum would be seriously inconvenient.

The bottom line: After Atlantic Marine, if your client seeks to avoid a forum-selection clause, these state-court standards appear to be more favorable than the standards that now apply in federal court owing to Atlantic Marine. If your client seeks to enforce a forum-selection clause, get thee to federal court.

July 8, 2014
Posted in  News