The Supreme Court’s Atlantic Marine Decision And Its Implications For Non-Compete Litigation

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On December 3, 2013, the Supreme Court issued a unanimous opinion in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas. A copy of the Court’s slip opinion can be found here. The facts in Atlantic Marine did not involve a covenant-not-to-compete, but all the same, the Supreme Court’s decision has potentially-significant implications for non-compete litigation and for the drafting of non-compete agreements.

The question before the Court in Atlantic Marine was the enforcement of a forum-selection clause. Atlantic Marine Construction Co., a Virginia company, had entered into a construction contract with the United States Army Corps of Engineers for a construction project at Fort Hood, Texas. Atlantic Marine, in turn, subcontracted with a Texas company, J-Crew Management, Inc., to perform some work on the Fort Hood project. The subcontract between Atlantic Marine and J-Crew Management specified that any disputes that might arise between them would be litigated in Virginia — this was, so to speak, Atlantic Marine’s “home turf.” However, when a dispute arose, J-Crew Management did not go to Virginia but instead sued Atlantic Marine in a federal court in Texas. Atlantic Marine then sought to get J-Crew Management’s lawsuit dismissed outright or else transferred to a federal court in Virginia. The lower courts, however, declined to dismiss or transfer the case, leading to a mandamus petition that eventually made its way to the Supreme Court.

The Supreme Court’s decision in Atlantic Marine is significant for two reasons: (i) the Supreme Court clarified the procedural mechanism for obtaining the dismissal or transfer of an action where the parties to the action also have an agreement with a valid forum-selection clause and (ii) the Supreme Court reiterated that such forum-selection clause are generally (albeit not always) enforceable.

As to the procedural mechanism, the Supreme Court explained that, when a particular federal forum is specified or permitted in the parties’ forum-selection agreement, the remedy when a lawsuit is filed in the “wrong” federal forum is a 28 U.S.C. § 1404(a) motion to transfer the action to the “right” forum. However, in cases where the forum-selection agreement requires resolution of disputes in a state court or in the courts of a foreign country, the remedy when a lawsuit is filed in the “wrong” forum is a motion to dismiss under the common-law doctrine of forum non conveniens. The analysis is the same on both types of motions — the distinction being that 28 U.S.C. § 1404(a) provides a mechanism whereby a federal court sitting in Maine can transfer an action to a federal court sitting in Hawaii, whereas there is no mechanism for a federal court in Maine to transfer an action to a state court in Hawaii, much less to a court sitting in Japan. Of course, following dismissal by a federal court in Maine on grounds of forum non conveniens, the plaintiff may re-file its suit in a state court in Hawaii, in a court in Japan, or in any other place specified in the parties’ forum-selection agreement.

As to general enforceability of forum-selection agreements, the Supreme Court explained: “When the parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as less convenient for themselves or their witnesses, or for their pursuit of the litigation.” Thus, when a plaintiff files its lawsuit in the “wrong” forum, “the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.”

What does this mean for non-compete agreements? Many non-compete agreements contain both choice-of-law and choice-of-forum clauses, and the Atlantic Marine decision arguably increases the likelihood (but does not guarantee) that choice-of-forum clauses will be enforced. Thus, if an employer is in a state that generally enforces non-compete agreements and is employing its employees in that state, the employer may want to give serious consideration to including choice-of-forum and choice-of-law clauses in its non-compete agreements, so as to specify that all disputes are to be resolved in the employer’s home state and under that state’s laws. That way, if an employee bound by a non-compete agreement quits his job and moves to another state to work for a competitor, the employer is more likely (albeit not guaranteed) to get “home turf” advantage in any litigation that might arise over the enforceability of the non-compete agreement.