Alternative dispute resolution allows parties to create their own form of justice system.

Another concept, forum selection, permits parties to choose where justice shall be meted out. While ADR is usually consensual, the forum selection process generally is unilateral, dictated by one party with superior bargaining power over another.

The federal trial courts in the district of Minnesota recently addressed a pair of concurrent forum selection cases. Both cases dealt with clauses choosing the court where claims were to be contested. Although the issues differed, both cases yielded the same results. The cases initiated in Minnesota could remain in their jurisdiction.

Loan litigation

A California-based business that sold mortgage loans to a bank headquartered in South Dakota, with a large presence in Minnesota, unsuccessfully challenged a lawsuit brought by the bank in Federal Court in Minnesota on grounds that it violated a forum selection clause in Wells Fargo Bank v. First California Mortgage Company. The bank sued the California entity and its marketing director who executed a personal guaranty, on grounds that the mortgage seller that failed to repurchase loans sold to the bank or indemnify the bank for losses on them.

The federal lawsuit was challenged on grounds that it conflicted with the provision of a forum selection clause in the guaranty agreement, providing that any dispute shall be governed by California law and that any lawsuit “may be brought” in California. U.S. District Court Judge Ann D. Montgomery rejected an effort to dismiss the case on grounds of improper venue or for transfer of venue to California.

A threshold issue is whether Minnesota was a proper venue. The forum selection clause did not dictate dismissal because it was not the type of “mandatory” provision using specific language calling for a “designated forum.” Rather, it was a “permissive” clause that provides “consent to jurisdiction and venue … [without] venue,” but does not “require a specific forum.”

Citing 8th Circuit case law, the iudge explained that a negotiated contract believes “sophisticated parties” constitutes a “risk management” tool that has the effect of “minimizing the risk” that the case may be brought in a particular disfavored jurisdiction. The clause here lacked mandatory language such as “shall” or “will,” which made it the type of “permissive clause” that does “not exclude jurisdiction or venue in any other forum.” Therefore, the “plain language” of the guaranty does not require that the case be brought exclusively in California.

With venue initially proper in Minnesota, a motion to transfer venue to California under 28 U.S.C. sec. 1404(a) was rejected. The statute allows transfer of venue from an appropriate federal forum to another for “the convenience of parties and witnesses and in the interest of justice.” Although California would be convenient for the guarantor, who lives there, deference must given [to] the bank’s choice of forum.”

The “weight of conveniences” favor the bank because it sold the loans at issue in Minnesota and the guarantor conducted business with the bank in this state. Furthermore, the documents and witnesses are located here. Finally, the business for whom the marketing director who signed the guaranty did not object to litigating the case in Minnesota. Transferring the case against the guarantor to California would sever the case, resulting in two lawsuits that would cause judicial inefficiency.

Settlement suit

A suit claiming violation of a confidential settlement agreement could be pursued in Minnesota despite a claim of forum selection elsewhere in Great Clips, Inc., v. Ross. A national franchise of hair care salons, based in Minnesota, franchised a group of salons in Texas, with forum selection clauses in each franchise agreement, stating that any legal proceedings must be venued only in federal or state court in Hennepin County.

After a dispute arose concerning performance of a franchise, the parties entered into a settlement agreement, which included a confidentiality provision. The Texas franchisee claimed that the Minnesota based franchisor violated the agreement by leaking information about the settlement to a newspaper in Texas. The Minnesota franchisor responded by filing a lawsuit in federal court in Minnesota seeking a declaration that did not breach the agreement, which prompted the franchisee to seek to claim venue was improper or to transfer the case to Texas.

U.S. District Court Judge Joan M. Ericksen held that the lawsuit could be continued in Minnesota. While the settlement agreement did not contain a forum selection clause, the franchisor asserted that the forum selection clause in each of the franchise agreements required that the case be brought in Texas.

Judge Ericksen rejected that argument, noting that a forum selection for Texas was raised by the franchisee in settlement negotiations but expressly rejected by the Minnesota-based franchisor. Because of the “diligent inclusion” of forum selection clauses in each of the franchise agreements, the absence of a forum selection clause in the settlement agreement indicates “an intent not to designate a forum for resolving disputes” arising under a settlement agreement. The forum selection clauses contained in the franchise agreements do not apply to because they had terminated before the alleged breach of confidentiality occurred.

Venue was proper in Minnesota under 28 U.S.C. sec. 1391(b)(2), which provides for venue wherever a “substantial part of the events or omissions giving rise to the claim occurred.” A number of activities relating to the settlement agreement occurred in Minnesota, including the draft of it by the Minnesota franchisor and negotiations for potential changes and modifications in the agreement.

Additionally, there was no indication that the claimed breach of confidentiality, consisting of alleged disclosure of confidential information, “occurred anywhere other than in Minnesota.”

Thus, there were “enough activities” involved in Minnesota to allow this state to be a “proper forum for litigating this dispute.” Since Minnesota has “a substantial connection in the claim,” the venue is proper in this jurisdiction.

A motion to transfer the case under sec. 1404(a) to the Northern District of Texas also was rejected. The convenience of the parties does not favor one jurisdiction over the other, and the convenience of witnesses “does not tip the balance in any particular direction.” Nor do the “interests of justice … favor transferring the case to Texas.”

Based on all of the relevant factors, the case will remain pending here, where it was initiated and properly venued.

Where a case is brought can be very important and sometimes nearly dispositive of the outcome. As these cases show, forum selection clauses can be important in determining where a case as litigated and, as a consequence, the potential outcome of the litigation.

Originally published in the March 11, 2013 edition of Minnesota Lawyer.