Recent U.S. Supreme Court Opinion Supports Forum Selection Clauses in Interstate Contracts

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On December 3, 2013, the United States Supreme Court in a unanimous decision made an important ruling that supports forum selection clauses in interstate contracts. In Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, et. al.  (12-929, December 3, 2012) the Court ruled that absent extraordinary circumstances, the district court should transfer a matter to the forum identified in a valid forum selection clause when a defendant files a 28 U.S.C. § 1404(a) motion to transfer. This opinion is important as it resolves a circuit split regarding the enforceability of forum selection clauses and establishes that the party opposing the forum selected in the contract carries the burden in motions to enforce forum selection clauses, and adds more certainty to parties in the interstate context. 

Background
The Atlantic Marine case involved two corporations that entered into a contract for a construction project in the Western District of Texas. The parties to the contract were Atlantic Marine Construction Company, a Virginia corporation with its principal place of business in Virginia, and J-Crew Management, Inc., a Texas corporation. The contract included a forum selection clause, which stated that all disputes between the parties “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.”

When a dispute over payment under the contract arose, J-Crew sued Atlantic Marine in the Western District of Texas, invoking the court’s diversity jurisdiction. Atlantic Marine moved to dismiss the suit, arguing that the forum selection clause rendered venue in the Western District of Texas “wrong” pursuant to 28 U.S.C. § 1406(a) and “improper” under Federal Rule of Civil Procedure 12(b)(3). In the alternative, Atlantic Marine moved to transfer the case to the Eastern District of Virginia under § 1404(a). Under this motion, Atlantic Marine contended that enforcing a forum selection clause solely under § 1404(a) would encourage parties to “forum shop,” as it allows parties to bring with them the choice of law rules of the original filed court, regardless of the location of the transferee court. Both of these motions were opposed and ultimately denied by the District Court and Court of Appeals.

Procedural History
The District Court of Texas denied Atlantic Marine’s motions, first concluding that Atlantic Marine should attempt to enforce the forum selection clause through a § 1404(a) motion to transfer, and not a motion to dismiss pursuant to § 1406(a) and Rule 12(b)(3). The District Court concluded that § 1404(a) was the exclusive mechanism for enforcing a forum selection clause. In addition, the District Court held that the moving defendant, Atlantic Marine, bore the burden of proof that a transfer was warranted. In its § 1404(a) analysis, the District Court applied the “balancing of the public and private interest factors” test to determine if a transfer was appropriate. However, while doing so, the forum selection clause was given little weight. Finding that Atlantic Marine failed its burden, the District Court denied the motions.

Thereafter, Atlantic Marine petitioned for a writ of mandamus to the Fifth Circuit. The Fifth Circuit denied the writ and upheld the District Court’s ruling. In its decision, the Fifth Circuit referenced the Supreme Court’s decision in Stewart Organization, Inc. v. Ricoh Corp, (1988) 487 U.S. 22, a case in which the Supreme Court determined that if the original venue is statutorily proper, the courts should enforce a forum selection clause through § 1404(a) and place the burden of proof on the moving defendant.

The U.S. Supreme Court overturned the Fifth Circuit and found that the case should be transferred to the Eastern District of Virginia pursuant to the valid forum selection clause.

Prior Split among Federal Courts
Prior to this opinion, there was a split among the federal circuit courts as to the proper mechanism to enforce a forum selection clause. The majority of federal circuit courts held that a valid forum selection clause in an agreement renders the venue of the case “improper” if in a forum other than the one designated by the parties in the contract. In these circuits, the forum selection clauses are routinely enforced through motions to dismiss pursuant to § 1406(a) and Rule 12(b)(3), as Atlantic Marine was attempting to do. The Third, Fifth and Sixth circuits follow a contrary rule, holding that the forum selection clauses should be analyzed pursuant to a § 1404(a) motion to transfer.

A split between the federal circuit courts also exists as to which party bears the burden in a § 1404(a) motion to transfer a case involving a forum selection clause. The Fifth and Ninth circuits place this burden of proof on the moving defendant to show why a transfer away from a forum that is statutorily proper is appropriate and justified under § 1404(a). The Third and Eleventh circuits shift this burden of proof to the plaintiff or the party looking to escape the transfer to show that the forum selection clause is unenforceable on grounds that are more substantial than that a transfer would be inconvenient.

The Decision
As identified above, the first issue before the Court was whether a party may enforce a forum selection clause by seeking the dismissal of the suit under § 1406(a) and Rule 12(b)(3), the mechanism employed by the majority of federal circuit courts. The Supreme Court determined that the proper mechanism to enforce a forum selection clause when the transferee forum is in the federal court system is by filing a § 1404(a) motion to transfer.

Although the Court of Appeals in the Atlantic Marine case properly identified § 1404(a) as the provision to enforce a forum selection clause, the Supreme Court overturned the analysis on the basis that the Court of Appeals failed to make the proper three “adjustments” to the typical § 1404(a) analysis when the transfer motion is premised on a forum selection clause.

The adjustments are as follows:

  • With the first adjustment, the Supreme Court clarified what party has the burden of proof in a § 1404(a) motion to transfer. Prior to this Supreme Court ruling, in a typical transfer-of-venue case that does not involve a forum selection clause, a court considering a § 1404(a) motion had to evaluate and weigh both public- and private-interest considerations to determine if a transfer would serve “the convenience of parties and witnesses” and otherwise promote “the interest of justice.” There had been a split between the federal circuit courts as to who bears the burden of proof in a § 1404(a) motion to transfer a case involving a forum selection clause; the Supreme Court resolved the circuit split, holding that the plaintiff or the party opposing a motion to enforce the forum selection clause bears the burden to show that public-interest factors (and not private-interest factors, as discussed below) overwhelmingly disfavor a transfer of the case to the forum agreed to by the parties in the contract. 
  • In the second adjustment, the Supreme Court determined that in evaluating a defendant’s § 1404(a) motion, the courts should deem the private-interest factors as weighing entirely in favor of the preselected forum agreed to by the parties in the contract. In the same respect, the court should not consider any arguments of the parties’ private interests on the basis that in preselecting a forum by contract, the parties have waived the right to challenge the forum as inconvenient. 
  • The third adjustment by the Supreme Court is perhaps the most significant as it has the potential to affect the procedural and substantive law that will be applied to the case. The Supreme Court clarified which choice of law rules should apply to the transferred case. The Court held that when the transfer stems from the enforcement of a forum selection clause, the plaintiff who inappropriately filed suit is prohibited from having the law of the court follow the case to the forum contractually selected by the parties. In other words, when a plaintiff breaches its contractual obligations and files a matter in a different forum than that identified in the forum selection clause, a § 1404(a) transfer of venue will not carry with it the original venue’s choice of law rules. As Justice Alito lays out in the opinion: “Not only would it be inequitable to allow the plaintiff to fasten its choice of substantive law to the venue transfer, but it would also encourage gamesmanship.” The Supreme Court in its evaluation concluded that “the court in the contractually selected venue should not apply the law of the transferor venue to which the parties have waived their right.” If the courts did so, it would be adverse to “the interest of justice” as it would disrupt the parties’ agreed-on contractual terms.

Ultimately, the Supreme Court concluded that the district courts should grant a § 1404(a) motion if the forum selection clause is valid and there is no “extraordinary circumstance” unrelated to the convenience of the parties that would clearly disfavor a transfer.

Takeaway
This Supreme Court opinion bridges the splits between the circuits on two crucial issues with respect to forum selection clauses and represents a significant stride for defendants who are seeking to enforce a forum selection clause. First, this ruling confirms that a § 1404(a) motion to transfer is the appropriate motion for a defendant to enforce a forum selection clause in the context of the federal court system. Moreover, when there is a forum selection clause involved, the burden of proof will be on the plaintiff to show why a transfer to the forum selected by the parties in the agreement would be improper. As discussed, through this opinion, the Supreme Court has clarified the § 1404(a) analysis for matters involving forum selection clauses by making three adjustments. Finally, this opinion serves as a safeguard for the choice of law of the contracting parties.

In light of this important decision, the parties to a contract must be ready to be bound by their selected forum identified in the agreement. It is crucial that the forum selection clause is not overlooked, as the clause should be well drafted and explicitly designate the forum that the parties intend to use to resolve a dispute should one arise. It is imperative that counsel for litigants carefully scrutinize relevant contracts at the inception of a suit to determine whether a valid forum selection clause exists and, if so, if it warrants a § 1404(a) motion to transfer.