On Monday, the U.S. Supreme Court agreed to hear a case that could have a big impact on how businesses negotiate contracts containing a forum selection clause. The case, Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc., addresses to what extent a party to a commercial contract can enforce a forum selection clause by filing a motion to dismiss or to transfer venue when a lawsuit is filed in a jurisdiction other than the parties’ agreed upon forum. The decision in this case should resolve a split among the federal circuit courts regarding the weight given to forum selection clauses contained in commercial contracts.
A forum selection clause represents an agreement between the parties that any litigation resulting from the parties’ contract will be initiated in a specific forum – usually the courts of a certain state. Almost every commercial contract today contains such a clause. Businesses rely on forum selection clauses to avoid having to litigate disputes in numerous jurisdictions and to bring some degree of certainty and stability to the uncertain world of commercial disputes.
Despite the fact that a forum selection clause is a negotiated contract term, courts of appeal in several federal circuits have found that such a clause is not necessarily controlling when determining the proper venue for a lawsuit. Instead, these circuit courts ruled that a forum selection clause is one of several factors to be considered in determining proper venue. Most recently, in Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc., the Fifth Circuit Court of Appeals upheld a lower federal court’s decision disregarding a forum selection clause.
Atlantic Marine Construction Company and J-Crew Management entered into a contract for construction labor and materials to be used in building a child development center in Virginia. The contract’s forum selection clause designated state and federal courts in Virginia as the proper venue for resolving contractual disputes. When Atlantic Marine allegedly failed to pay J-Crew Management for its services, J-Crew Management filed suit in federal court in Texas. Atlantic Marine moved to dismiss the lawsuit or, in the alternative, to transfer the lawsuit to federal court in Virginia, pursuant to the forum selection clause in the parties’ contract. The Texas district court declined to dismiss or transfer the case to Virginia, finding that the forum selection clause was not controlling, and placing the burden on Atlantic Marine to show why Texas was an improper venue.
On review, the Fifth Circuit Court of Appeals held that the district court did not abuse its discretion in determining that a forum selection clause does not render venue outside of the chosen forum per se improper. Rather, the appellate court found that the district court properly engaged in a balancing test that considered the forum selection clause as only one of several factors in determining whether the lawsuit could be filed in Texas.
Whether courts have the discretion to disregard a negotiated forum selection clause is the question that the Supreme Court will answer when it takes up this case next term. If the Supreme Court sides with the Fifth Circuit and a minority of other federal circuits that have decided this issue, it could spell great uncertainty for businesses that have negotiated forum selection clauses. As explained in an amicus brief filed by the U.S. Chamber of Commerce in the case, “[b]y declining to enforce a forum selection clause in an agreement that was negotiated in an arms-length transaction between experienced business entities, the decision below frustrates the legitimate contractual expectations of thousands of businesses with similar contract provisions.”
Oral arguments in Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc. will be heard next term (October 2013) with a decision expected sometime in 2014. Check back with mcmanislaw.com/blog for updates and analysis of the decision.
Lauren Coatney is an attorney with McManis Faulkner. Her practice focuses on business litigation, working with clients to find efficient solutions to complex problems. For more information, please visit mcmanislaw.com.