Supreme Court Strengthens Forum-Selection Clauses
By Bradford S. Babbitt – February 5, 2014
Contracting parties have always been free to agree in advance about the location in which they will resolve any future dispute over their contract. But courts have not always enforced contractual forum-selection clauses, sometimes allowing a plaintiff to sue in a forum different from that established by the contract. In deciding whether to enforce a forum-selection clause, these courts have allowed issues of the parties’ convenience to trump their contractual choice—opening the door to forum-shopping and potentially rewarding the winner of a race to the courthouse.
In a recent, unanimous decision, the U.S. Supreme Court strengthened the power of contracting parties to decide where their disputes will be resolved by ruling that contractual forum-selection clauses should be enforced in all but the “most exceptional cases.” The Court’s decision in Atlantic Marine Construction Company, Inc. v. U.S. District Court for the Western District of Texas, 133 S. Ct. 1748 (2013), undermined parties’ ability to shop for the most favorable forum regardless of their contractual forum selection.
Lower Courts Decline to Enforce Forum-Selection Clause
Atlantic Marine Construction had its genesis in a contract with the United States Army Corps of Engineers to build a child-development center at Fort Hood in Texas. Atlantic Marine, a company based in Virginia, entered into a subcontract for work on the project with J-Crew Management, Inc., a Texas company. The subcontract included a forum-selection clause, which provided that all disputes between the parties would be litigated at the federal or state courts of Virginia.
After a dispute arose relating to the subcontract, J-Crew sued Atlantic Marine in federal court in Texas. Atlantic Marine moved to dismiss, arguing that J-Crew had selected the “wrong” venue under 28 U.S.C. § 1406(a) and that venue was “improper” under Federal Rule of Civil Procedure 12(b)(3). In the alternative, Atlantic Marine moved to transfer the case to federal court in Virginia under 28 U.S.C. § 1404(a). J-Crew opposed the motions.
The district court ruled, first, that transfer under section 1404(a) was the only remedy available to Atlantic Marine and that it bore the burden of proving that such a transfer would be appropriate. The district court opined that the parties’ forum-selection clause was only one factor to be considered, among other public- and private-interest factors. Based largely on the fact that the majority of J-Crew’s witnesses were located in Texas, the district court decided that Atlantic Marine had failed to prove that transfer would be “in the interest of justice or increase the convenience to the parties and their witnesses.” After Atlantic Marine unsuccessfully petitioned the court of appeals for a writ of mandamus directing the district court to dismiss the case or transfer it to Virginia, the Supreme Court granted certiorari.
Transfer, Not Dismissal, Is the Correct Way to Enforce Clauses
The first question before the Court was whether J-Crew’s case should have been dismissed under Rule 12(b)(3) because the venue selection was “improper,” or under section 1406(a) because the venue was “wrong.” The Court’s response: neither. Whether venue is “improper” or “wrong” depends entirely on whether the case falls within the scope of any of the subsections of 28 U.S.C. § 1391(b). If it does, then venue is proper; if it does not, then venue is improper and the case must be dismissed or transferred under section 1406(a). Notably, none of the subsections of 1391(b) reference forum-selection clauses. Thus, whether the parties entered into a contract containing a forum-selection clause has no bearing on whether a case falls into one of the categories of cases listed in section 1391(b). For that reason, a party’s failure to adhere to its pre-suit selection of a forum in which to resolve disputes does not render the venue either “improper” or “wrong” warranting dismissal.
Section 1404(a) authorizes transfer of a case “[f]or the convenience of parties and witnesses [and] in the interest of justice.” Unlike transfer under section 1406(a), transfer under section 1404(a) is not conditioned on the original venue being “wrong.” Additionally, 1404(a) allows a court to transfer the case to any federal district to which the parties had previously agreed by contract. Thus, section 1404(a) provides a mechanism for enforcement of forum-selection clauses that point to a federal court. Atlantic Marine, slip pp. at 9.
A similar result applies to forum-selection clauses that point to a state court or a foreign tribunal. The Court explained that section 1404 codifies and applies the doctrine of forum non conveniens to the subset of cases in which the transferee forum is a federal court. Transfer under forum non conveniens is the appropriate way to enforce a forum-selection clause pointing to a state or foreign court. Id. at 10.
Clauses Should Be Enforced “In All But the Most Exceptional Cases”
Turning to the way courts should evaluate motions to transfer cases involving forum-selection clauses, the Court first reviewed how motions to transfer should be decided in the absence of a forum-selection clause. In those cases, courts evaluate the private interests of the parties as well as public-interest factors in deciding whether transfer is appropriate under either section 1404(a) or forum non conveniens. Private interests include ease of access to sources of proof, the ability to compel witnesses to testify and the cost of doing so, and other practical problems that make trial of a case easy, expeditious, and inexpensive. Public-interest factors may include court congestion, familiarity with the applicable law, and the interest in having the dispute resolved at home.
The calculus changes, however, when the parties had contractually agreed to a forum in which to resolve their disputes. In that instance, enforcement of the forum-selection clause, protects the parties’ “legitimate expectations and furthers the vital interests of the judicial system.” Additionally, the overarching consideration in evaluating a motion to transfer under section 1404(a) is whether transfer would promote “the interest of justice.” Because enforcement of a forum-selection clause protects both the parties’ expectations and the interests of justice, forum-selection clauses should be given “controlling weight in all by the most exceptional cases.” Atlantic Marine, slip op. at 12.
New Standards for Enforcement
To be sure that courts ordinarily enforce forum-selection clauses, the Court changed both the factors to be considered under a transfer motion and the way those factors should be considered. First, the Court ruled that the plaintiff’s initial choice of forum deserved no weight in the analysis. Although plaintiffs are usually granted the “privilege” of selecting the venue, the plaintiff’s prior contractual agreement to file suit only in a specified forum constitutes the exercise of that privilege before the dispute arose. Given that the parties presumably bargained for the selected forum, only that initial choice deserves deference from a court evaluating a motion to transfer.
Second, the Court squarely placed on the plaintiff the burden of establishing why the forum-selection clause should not be enforced. This reverses the roles that apply to a typical transfer motion. In the presence of a forum-selection clause, the party defying its previous selection of a forum bears the burden of establishing that the forum for which it bargained is unwarranted.
Third, the Court ruled that the parties’ private interests should not be considered in deciding whether to enforce a forum-selection clause. When parties select a forum, they waive the right to challenge its convenience. Whatever inconvenience the parties would suffer from litigating in the contractual forum “was clearly foreseeable at the time of contracting.” Id. at 14 (quoting The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 17–18 (1972)). Thus, courts deciding motions to transfer must presume that all of the parties’ private-interest factors weigh in favor of the contractual forum and consider only public-interest factors in deciding whether to refuse to transfer the case.
Fourth, the Court ensured that a plaintiff who defies a forum-selection clause but then loses a motion to transfer cannot reap a reward for engaging in the tactic. Normally, a court to which a case is transferred applies the law of the state of the transferring court. This exception to the standard rule that federal courts apply the laws of the states in which they sit exists to prevent defendants from seeking to transfer cases to gain the benefit of laws in the transferee jurisdiction. But to apply that exception to cases filed in derogation of a forum-selection clause could reward plaintiffs by preserving to them the benefit of laws of a forum to which they had not contractually agreed. In the Court’s view, doing so would “encourage gamesmanship.” For that reason, the Court ruled that transferee courts should not apply the law of the transferor venue in cases involving forum-selection clauses. Id. at 14–15.
The Court’s Atlantic Marine ruling strengthens parties’ ability to decide for themselves where their disputes will be resolved. Those agreements will be enforced “in all but the most exceptional cases.” The Court has established almost insurmountable hurdles to defiance of a forum-selection clause, and has put the burden on the party seeking to avoid enforcement of the clause. Forum-selection clauses are stronger today than ever before. Contracting parties should consider their selections carefully, as those selections will almost certainly be enforced in the future.
Keywords: litigation, commercial, business, Atlantic Marine, Supreme Court, forum selection, venue, forum non conveniens, transfer
Bradford S. Babbitt chairs the Business Litigation Group of Robinson & Cole LLP in Hartford, Connecticut, and is a member of the ABA's Section of Litigation Content Management Committee.