United States: Enforcement Of Forum Selection Clauses Just Got Easier

The U.S. Supreme Court's recent decision in Atl. Marine Const. Co., Inc. v. U.S. Dist. Ct. for the W. Dist. of Tex., et al., No. 12-929, 2013 U.S. LEXIS 8775, 571 U.S. ___ (2013), provides needed clarity not only on the mechanism by which forum selection clauses should be enforced but also makes clear that such clauses should, in fact, be enforced, absent "extraordinary circumstances." This decision should make it easier for a party to obtain its contractually bargained for forum if litigation arises and, hopefully, reduce the number of challenges that are made to such contractual provisions.

Background

Atlantic Marine, a Virginia corporation, entered into a construction contract with the U.S. Army Corps of Engineers for a project at Fort Hood in Texas. Atl. Marine, 2013 U.S. LEXIS 8775, at *8. Atlantic Marine, in turn, entered into subcontract with J-Crew Management, Inc., a Texas corporation. Id. The subcontract contained a forum-selection clause specifying that disputes would be litigated in specific state or federal court in Norfolk, Virginia. Id. After a dispute arose between Atlantic Marine and J-Crew, however, J-Crew sued in the Western District of Texas, ignoring the forum-selection clause. Id.

Atlantic Marine moved to dismiss the Texas lawsuit based on the forum-selection clause in the parties' contract. Atlantic Marine argued that the clause rendered venue "wrong" under § 1406(a) or "improper" under Fed. R. Civ. P. 12(b)(3). Id. at *9. Section 1406(a) provides that when a case is brought in the "wrong" venue, the district court must dismiss or transfer the case to "any district or division in which it could be been brought." Similarly, Rule 12(b)(3) allows a party to move to dismiss on the basis of "improper venue."

Alternatively, Atlantic Marine moved to transfer to the Eastern District of Virginia under § 1404(a). Section 1404(a) provides a district court broader power to transfer a case "for the convenience of parties and witnesses, in the interest of justice . . . to any other district or division where it might have been brought or to any district or division to which all parties have consent."

The U.S. District Court for the Western District of Texas denied both motions, holding that § 1404(a) was the sole mechanism for enforcing a forum-selection clause and that Atlantic Marine bore the burden of establishing that transfer was in fact appropriate. Id. (citing U.S. ex rel. J-Crew Mgmt., Inc. v. Atl. Marine Constr. Co., 2012 U.S. Dist. LEXIS 182375 (W.D. Tex. Apr. 6, 2012)). The District Court then proceeded to examine the public- and private-interest factors applicable to transfers under § 1404(a), of which the existence of a forum-selection clause was only one consideration. Id. Ultimately, the District Court found that Atlantic Marine had not met its burden – with the District Court giving particular weight to the fact that "compulsory process [would] not be available for the majority of J-Crew's witness," and that there would be "significant expense for those willing witnesses." Id. at *9-10.

Atlantic Marine petitioned the U.S. Court of Appeals for the Fifth Circuit for a writ of mandamus. The Fifth Circuit denied the petition, holding that Atlantic Marine did not show that it had a "clear and indisputable" right to relief. Id. at *10 (citing In re Atl. Marine Const. Co., Inc., 701 F.3d 736 (5th Cir. 2012)). The Fifth Circuit agreed with the District Court that § 1404(a) was the only mechanism for enforcement of a forum-selection clause that called for litigation to be brought in another federal forum. Id. The Fifth Circuit also held that the proper mechanism for enforcement of a forum selection clause where the selected forum was a state court was Rule 12(b)(3). Id. at *10-11. The Fifth Circuit held that the District Court had not abused its discretion in denying Atlantic Marine's motions, even though there was no dispute that the forum-selection clause was valid. Id. at *11.

The Supreme Court's Reversal

The Supreme Court reversed, holding that both lower courts' analysis of the substantive issue – whether the forum selection clause should have been enforced -- was incorrect.

Procedurally, the Supreme Court agreed with the District Court and Fifth Circuit and concluded that a forum-selection clause selecting a federal forum may be enforced through a motion for transfer under § 1404(a), which does not require that the venue chosen by the plaintiff be "wrong" or "improper." Id. at *19. Further, where the forum-selection clause instead calls for litigation to be brought in a state forum and the plaintiff sues in federal court, the mechanism to transfer the matter to the selected state forum is not, as the Fifth Circuit had held dismissal under Rule 12(b)(3), but rather was for a defendant to seek a transfer under the doctrine of forum non conveniens. Id. at *20-21. The Supreme Court declined to consider whether Fed. R. Civ. P. 12(b)(6) might also provide a mechanism for enforcing a forum-selection clause. Id. at *22-23.

The Supreme Court explained that dismissal or transfer was not merited under either § 1406(a) or Rule 12(b)(3) because those provisions required that venue be either "wrong" or "improper," an analysis governed by the venue provisions of 28 U.S.C. § 1391. Id. at *12-13. "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 §1391(b)." Id. at *13. Thus, the existence of a forum-selection clause has no impact on whether venue is "wrong" or "improper," and therefore, § 1406(a) and Rule 12(b)(3) are not appropriate mechanisms for enforcing forum-selection clauses. Id.

The question before the Court then became how a court should apply the balancing test applicable to transfers under § 1404(a) and when determining forum non conveniens. The traditional balancing test involves the weighing of a whole host of factors under which the court determines whether, on balance, the transfer would serve the convenience of the parties and witnesses and would otherwise promote the interest of judgment. The Supreme Court held that the District Court and Fifth Circuit had erred in performing the traditional balancing test, and that they instead should have applied an extraordinary circumstances test. Id. at *25-26. This was because in agreeing to a forum-selection clause, the parties have already determined the most appropriate forum. Therefore, "a valid forum-selection clause [should be] given controlling weight in all but the most exceptional cases." Id. (quoting Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 33 (1988) (Kennedy, J., concurring).

The balancing test that should be applied in the face of a valid forum-selection clause is altered in three ways. First, the plaintiff's choice of forum bears no weight because the plaintiff already agreed to a forum and should not be allowed to change that agreement unilaterally. Id. at *26. In fact, where there is a valid forum-selection clause, the plaintiff – not the defendant – bears the burden of demonstrating that transfer to the bargained for forum is unwarranted. Id. Second, the court should not consider arguments concerning the parties' private interests. Rather, the court should "deem the private-interest factors to weigh entirely in favor of the preselected forum." Id. at *27. This means that arguments that the chosen forum is inconvenient for a particular party or for witnesses should not be considered. As the court can only consider the public-interest factors, which "will rarely defeat a transfer motion, the practical result is that forum-selection clauses should control except in unusual cases." Id. at *27-28.

The final alteration to the traditional transfer balancing test is that the original venue's choice of law rules will not control in the transferee forum. The Court reasoned that it would be inequitable for the plaintiff to change the applicable choice of law rules by flouting the forum-selection clause to which it agreed. Id. at *28. Moreover, requiring the transferee court (i.e., the parties' chosen forum) to apply the choice of law rules from the court in which the plaintiff wrongfully filed would encourage gamesmanship and forum shopping. Id. at *29-30.

Going Forward: Clarity and Certainty

The Supreme Court's holding in Atlantic Marine should provide comfort to entities who previously had found themselves embroiled in litigation in a forum they did not select, bearing the burden to demonstrate that the forum that the parties contractually agreed to was, in fact, appropriate. The decision also provides guidance to the lawyers for those entities who often resorted to seeking to transfer the case to the agreed-to forum under numerous legal theories, never sure which one the court might embrace. Now, going forward, both entities and their counsel know that when faced with a valid forum selection clause federal courts will evaluate transfer motions under the presumption that the case should proceed in the parties' chosen forum.

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