Supreme Court Provides Clarity On Contractual Forum-Selection Clauses

by Akerman LLP
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A forum-selection clause in a contract offers predictability and clarity of venue in case a dispute arises over the contract. But, when such a dispute arises, if the plaintiff does not commence litigation in the contractually agreed venue, will the court enforce the forum-selection clause? In Atlantic Marine Construction Company, Inc. v. U.S. District Court for the Western District of Texas, 134 S. Ct. 568 (Dec. 3, 2013), an unanimous opinion issued on December 3, 2013, the U.S. Supreme Court established some new and clear guidance on the effects of forum-selection clauses, as well as the procedural mechanism to enforce them.

The Court made two significant holdings. First, it confirmed that outright dismissal of an action based on a forum-selection clause is possible only when the contractually designated forum is not another federal district court (e.g., when it is a state court or a court of a foreign country). When the contractually designated forum is a federal court, transfer to that court, rather than dismissal, is the only available remedy. Second, the Court established three modifications to existing analysis on a motion to transfer based on a forum-selection clause: (1) plaintiff’s choice of the original forum merits no weight, (2) the parties’ and witnesses’ convenience is not considered, and (3) in diversity cases, the transferee court (i.e., the contractually designated court) will apply its own state substantive laws rather than those of the court in which plaintiff wrongly commenced the action.

Factual and Procedural Background

Atlantic Marine Construction Co. (“Atlantic Marine”) entered into a subcontract with J-Crew Management, Inc. (“J-Crew”). The subcontract included a forum-selection clause, designating the federal or a state court in Norfolk, Virginia as the litigation forum. J-Crew subsequently sued Atlantic Marine in the Western District of Texas under the court’s diversity jurisdiction. Atlantic Marine moved to dismiss, arguing that the forum-selection clause rendered venue in the Western District of Texas “wrong” under 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 28 U.S.C. § 1404(a).

The District Court denied Atlantic Marine’s motion. It analyzed the motion under § 1404(a), which it held is the exclusive mechanism for enforcing a forum-selection clause. The District Court then held that Atlantic Marine bore the burden of establishing that a transfer would be appropriate and considered a list of public and private interest factors, of which the forum-selection clause was only one. Giving particular weight to the lack of compulsory process for J-Crew’s witnesses and the significant expense for witnesses willing to testify, the District Court held that Atlantic Marine had failed to show that a transfer was appropriate.

Atlantic Marine petitioned the Fifth Circuit for a writ of mandamus. The Fifth Circuit denied Atlantic Marine’s petition, holding that (1) § 1404(a) is the exclusive mechanism for enforcing a forum-selection clause that points to another federal forum; and (2) the District Court had not clearly abused its discretion in refusing to transfer the case after conducting the balance-of-interests analysis required by § 1404(a).

The Supreme Court’s Holding

The Supreme Court unanimously reversed the Fifth Circuit’s decision. In doing so, the Court provided two significant holdings. Each is discussed below.

1. When venue is proper in the original district, a transfer pursuant to § 1404 or dismissal pursuant to forum non conveniens are the proper procedural mechanisms to enforce a forum-selection clause.

To obtain a case’s dismissal, venue in the original district must be “wrong” or “improper” under § 1406 or Rule 12(b)(3), respectively. Whether venue is “wrong” or “improper” is generally governed by 28 U.S.C. § 1391 or, in special cases, another specific venue statute. The Court rejected Atlantic Marine’s argument that a forum-selection clause rendered “wrong” or “improper” all except the contractually selected venue. Therefore, dismissal of a case pursuant to § 1404 or Rule 12(b)(3) is inappropriate where the federal venue statutes permit a case to be brought in the original district.

The Court held that the forum-selection clause may be enforced through a motion to transfer under § 1404(a). Section 1404(a) provides a mechanism for enforcement of forum-selection clauses that point to a particular federal district. For cases where a federal forum is unavailable—(e.g., when the forum-selection clause designates a state or foreign court)—the appropriate way to enforce such a clause is through the doctrine of forum non conveniens. The Court held that “Section 1404(a) is merely a codification of the doctrine of forum non conveniens for the subset of cases in which the transferee forum is within the federal court system; in such cases, Congress has replaced the traditional remedy of outright dismissal with transfer.” Another federal forum is available in this case and the Court proceeded to analyze the appropriateness of a transfer pursuant to § 1404.

2. Where a forum-selection clause exists, the Court held that the traditional § 1404 transfer analysis requires three modifications.

If a case does not involve a forum-selection clause, a district court considering a § 1404(a) motion or a forum non conveniens motion must evaluate and weigh both the convenience of the parties and witnesses and various public-interest considerations. These considerations have generally been grouped into “private interest factors” and “public interest factors.” Private interest factors include (i) the relative ease of access to sources of proof, (ii) availability of compulsory process for attendance of unwilling, and the cost of obtaining attendance of willing, witnesses, (iii) the possibility of viewing relevant premises; and (iv) all other practical problems that make trial of a case easy, expeditious and inexpensive. Public interest factors include (i) the administrative difficulties flowing from court congestion, (ii) the local interest in having localized controversies decided at home; and (iii) the interest in having the trial of a diversity case in a court that is familiar with the law of the state in which the court is located. A court must also give some weight to the plaintiff’s choice of forum.

Where a forum-selection clause is present, the Court held that this analysis requires three modifications. First, the plaintiff’s choice of forum merits no weight. Instead, as the party defying the forum-selection clause, the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted.

Second, a court evaluating a defendant’s § 1404(a) motion to transfer based on a forum-selection clause should not consider arguments about the parties’ private interests. This is because, when parties agree to a forum-selection clause, they waive the right to challenge the pre-selected forum as inconvenient or less convenient for themselves or their witnesses. In these circumstances, the Court deems the private-interest factors to weigh entirely in favor of the pre-selected forum. A district court thus may only consider arguments about public-interest factors. While the Court did not foreclose the possibility that a forum-selection clause may be defeated by public-interest factors, it noted that “those factors will rarely defeat a transfer motion,” and that “the practical result is that forum-selection clauses should control except in unusual cases.” Although it is “conceivable,” “such cases will not be common.”

Third, when a party bound by a forum-selection clause files suit in a different forum, a § 1404(a) transfer of venue will not carry with it the original venue’s choice-of-law rules. When venue is transferred under § 1404(a) in other contexts (not involving a forum-selection clause), the Court requires that the state law applicable in the original court also apply in the transferee court. However, when a plaintiff files suit in violation of a forum-selection clause, the court in the contractually selected venue, to which the case is transferred, should apply the choice-of-law rules of the state in which the transferee court is located, not those of the state in which the plaintiff originally sued, as both parties waived the right to the application of those rules.

For these reasons, the Supreme Court reversed the Fifth Circuit’s decision and remanded the case to the District Court to consider whether any public-interest factors would overcome the parties’ contractual choice of forum.

A Significant Change in the Law

In Atlantic Marine, the Court made a forum-selection clause all but dispositive as to a motion to transfer venue pursuant to § 1404, noting that the only factors that a court may consider, the public-interest factors, “rarely defeat a transfer motion” and that “the practical result is that forum-selection clauses should control except in unusual cases.”

Previously, it had been the common practice in the federal courts to treat the forum-selection clause as a significant factor—but not a dispositive one—in the analysis of the private-interest and public-interest factors on a § 1404 transfer motion. See Wright & Miller, Standard in Considering Transfer—Effect of a Forum Selection Clause, 15 Fed. Prac. & Proc. Juris. § 3854.1 (4th ed.) (“the existence of a forum selection clause cannot be dispositive on a motion for transfer”).

In light of Atlantic Marine, it will be difficult to argue that a forum-selection clause is anything but dispositive. Even though the Court noted that public-interest factors could, in “unusual cases,” defeat a forum-selection clause, it is difficult to imagine that in a run-of-the-mill commercial litigation the public-interest factor considerations would be so strong as to override the contractual forum-selection clause. Thus, in a typical commercial litigation, federal courts are now likely to consider the forum-selection clause to be dispositive.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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