Locke Lord QuickStudy: U.S. Supreme Court Provides Clear Guidance and Formidable Tools for Parties Seeking To Enforce Contractual Forum-Selection Clauses

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    On December 3, 2013, the Supreme Court issued an important ruling for companies that routinely conduct business in multiple venues across the country or internationally. In Atlantic Marine Construction Co., Inc. v. U.S. District Court For The Western District of Texas, 571 U.S. ___, No. 12-929 (Dec. 3, 2013) (slip opinion), the Court issued a unanimous opinion favoring enforcement of contractual forum-selection clauses and holding that a party who files suit in violation of such a clause faces a heavy burden to avoid transfer of the case.

    Scott Hastings, Tom Loose, and Chris Boeck of Locke Lord LLP, who represented the petitioner Atlantic Marine Construction Company, Inc. (AMC), argued that forum-selection clauses figure centrally in their client’s negotiation of its contracts with subcontractors because AMC provides construction services to local, state, and federal governments and agencies in numerous venues throughout the country. The Supreme Court acknowledged this point in its reversal of the Fifth Circuit Court of Appeals, explaining that such a clause “may, in fact, have been a critical factor in [the parties’] agreement to do business together in the first place.” Justice Samuel Alito, writing for the unanimous court, concluded that “[i]n all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.”

    In its opinion, which overturns various precedent in at least nine federal circuits, the Court provides specific and comprehensive guidance regarding the proper procedure to enforce a contractual forum-selection clause. This note outlines several of the key holdings.

    A. Contractual Forum-Selection Clauses Should Be Enforced Pursuant To 28 U.S.C. § 1404(a)
    The Court first considered whether a contractual forum-selection clause should be enforced pursuant to Federal Rule of Civil Procedure 12(b)(3) (improper venue), 28 U.S.C. § 1406(a) (wrong division or district), or 28 U.S.C. § 1404(a) (change of venue for convenience). After engaging in analysis of the statutory language and prior case precedent, the Court held that such clauses should be enforced by a motion to transfer under 28 U.S.C. § 1404(a), which states:

    For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.

    In so holding, the Court overturned precedent in the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, which had previously followed the majority position of allowing enforcement of forum-selection clauses pursuant to § 1406 or Rule 12(b)(3).

    B. Forum-Selection Clauses Should Be Given Controlling Weight In All But The Most Exceptional Cases
    After establishing that forum-selection clauses should be enforced under 28 U.S.C. § 1404(a), the Court then provided a detailed explanation of the proper presumptions, standards, and factors of consideration under § 1404(a) analysis when the parties have agreed to a valid forum-selection clause. The court first noted that “a proper application of § 1404(a) requires that a forum-selection clause be ‘given controlling weight in all but the most exceptional cases’.” (quoting Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22 (1988) (Kennedy, J., concurring)).

    While under traditional 1404(a) analysis, a court should evaluate both the convenience of the parties and the various public interests involved, the Court held “[t]he calculus changes . . . when the parties’ contract contains a valid forum-selection clause, which ‘represents the parties’ agreement as to the most proper forum’” (quoting Stewart, 487 U.S. at 31). In this regard, the Court confirmed the general presumption in favor of enforcement of valid forum-selection clauses, noting that such clauses will ordinarily warrant transfer absent exceptional circumstances, and then proceeded to identify three specific ways in which the presence of a valid forum-selection clause will alter the traditional 1404(a) analysis:

    • “First, the plaintiff’s choice of forum merits no weight. Rather, 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. . . . [W]hen a plaintiff agrees by contract to bring suit only in a specified forum—presumably in exchange for other binding promises by the defendant—the plaintiff has effectively exercised its ‘venue privilege’ before a dispute arises. Only that initial choice deserves deference, and the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.”
    • “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. When parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation. A court accordingly must deem the private-interest factors to weigh entirely in favor of the preselected venue.”1
    • “Third, when a party bound by a forum-selection clause flouts its contractual obligation and 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—a factor that in some circumstances may affect public-interest considerations.”

    The Supreme Court found the Fifth Circuit had erred by placing the burden on AMC instead of the plaintiff—who was attempting to avoid its contract—and by considering private interest factors in its § 1404(a) analysis. The Court held that the parties had resolved all private interests through the negotiation of their contract and concluded, “no public-interest factors that might support the denial of Atlantic Marine’s Motion to transfer are apparent on the record before us.”

    C. In The Case Of A Forum-Selection Clause Calling For A Nonfederal Forum, The Court Should Apply An Identical Standard Under The Doctrine Of Forum Non Conveniens
    The Court also addressed the appropriate procedure and standard applicable when the forum-selection clause calls for transfer exclusively to a state or foreign jurisdiction rather than another federal court. The Fifth Circuit had stated that such clauses should be enforced pursuant to Rule 12(b)(3) or 28 U.S.C. § 1406 because a federal court has no authority to transfer federal litigation to a state or foreign court under § 1404(a). The Supreme Court disagreed and held:

    If venue is proper under federal venue rules, it does not matter for the purpose of Rule 12(b)(3) whether the forum-selection clause points to a federal or a nonfederal forum. Instead, the appropriate way to enforce a forum-selection clause pointing to a state or foreign forum is through the doctrine of forum non conveniens. . . . And because both § 1404(a) and the forum non conveniens doctrine from which it derives entail the same balancing-of-interests standard, courts should evaluate a forum-selection clause pointing to a nonfederal forum in the same way that they evaluate a forum-selection clause pointing to a federal forum.

    Thus, the same standards and presumptions apply to forum-selection clauses regardless whether the contractually-selected forum is federal or nonfederal. If a plaintiff files suit in violation of a forum-selection clause calling exclusively for a state or foreign forum, the defendant should seek dismissal of the suit under the doctrine of forum non conveniens, and the Court’s recent ruling will allow the defendant to avail itself of the same strong presumptions in favor of enforcement of the clause that it would have under a § 1404 motion.2

    D. What To Take Away From Atlantic Marine Construction Co., Inc

    • A party defending litigation in a forum contrary to an valid forum-selection clause should file a motion to transfer the suit pursuant to 28 U.S.C. § 1404(a), as opposed to filing a motion under § 1406 or Rule 12(b)(3). In the event the clause specifies a nonfederal forum, exclusively, the defendant should file a motion to dismiss pursuant to the doctrine of forum non conveniens. In either event, the standards and presumptions favoring enforcement of the clause are the same.
    • Once the defendant files such a motion, the plaintiff will face a heavy burden to avoid transfer of the case (or dismissal, in the event of a forum non conveniens motion) and the district court may only consider arguments pertaining to public-interest factors. The Supreme Court has enunciated a daunting standard: “[b]ecause those [public interest] factors will rarely defeat a transfer motion, the practical result is that forum-selection clauses should control except in unusual cases.”
    • In the event of transfer under § 1404(a) (or forum non conveniens), due to the existence of a valid forum-selection clause, the choice-of-law of the original forum does not transfer with the case, as it might under a traditional transfer for convenience. Plaintiffs will not be rewarded for filing suit in contravention of their contracts.

    1   These 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 forum that is at home with the law.
    2   Notably, a defendant in federal court cannot proceed under the doctrine of forum non conveniens, and seek dismissal of the suit instead of transfer, when the clause being enforced allows for an alternative federal forum. The Court foreclosed this possibility, stating that “Section 1404 represents 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.” (Slip Opinion at *10).

    For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author:

    Christopher Boeck | 214-740-8482 | cboeck@lockelord.com

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