Where a dispute must be resolved may be a key negotiating point in a commercial transaction. For that reason, forum selection clauses in commercial contracts are common. Last week, the United States Supreme Court fortified such clauses in an opinion that places the decision about where a dispute must be resolved squarely in the hands of parties. The court’s decision represents a respect for freedom of contract and the parties’ own expectations as to where a dispute will unfold.
In Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas, --- U.S. ---, 2013 WL 6231157 (Dec. 3, 2013), the court considered a dispute between a general contractor, Atlantic Marine, and a subcontractor, J-Crew Management, Inc. The parties’ contract contained a forum selection clause stating that any disputes were to be settled in Virginia. But when a dispute arose, rather than honoring this contract term, J-Crew sued Atlantic Marine in the Western District of Texas. Atlantic Marine moved to dismiss, arguing that the “venue” for the case was improper under either 28 U.S.C. § 1406(a) (authorizing dismissal for “wrong” venue) or Federal Rule of Civil Procedure 12(b)(3) (motion to dismiss for “improper” venue).
In addition, Atlantic Marine filed a motion to transfer under 28 U.S.C. § 1404(a) (authorizing a change of venue “[f]or the convenience of parties and witnesses, in the interest of justice”). The district court denied both motions. Atlantic Marine then sought a mandamus from the Fifth Circuit directing the district court to dismiss the case under § 1406(a) or transfer it to the Eastern District of Virginia under § 1404(a). The Fifth Circuit denied the petition, upholding the district court’s decision. In so ruling, the Fifth Circuit waded into an ongoing circuit split regarding the effect of forum selection clauses on venue. The disagreement among the circuits centered on whether bringing suit in violation of a forum selection clause renders venue “wrong” for purposes of § 1406(a) and/or “improper” for purposes of Rule 12(b)(3).
The Supreme Court reversed the Fifth Circuit. The court’s decision turns on this basic principle: “Venue” is a matter of statute, and forum selection clauses are a matter of contract — and those two concepts should not be confused. Federal civil venue is controlled by 28 U.S.C. § 1391, which addresses the forum’s connection with defendants and underlying events but says nothing about contractual choice of venue. Given this, the court insisted, “venue is proper so long as the requirements of [§ 1391] are met, irrespective of any forum selection clause.” But these statutory venue provisions have nothing to do with overriding the parties’ contract.
The court also distinguished between forum selection clauses which specify a federal forum and those which do not. If a federal forum is specified, a § 1404(a) transfer motion is now the sole means of enforcing the clause. But if a federal forum is not specified, the forum non conveniens doctrine should play the same role.
Turning from statutory venue provisions to contractual forum selection clauses, the court provided a clear path for enforcing such clauses. It did so in three ways:
- First, the court stressed that forum selection clauses represent “bargained for” rights of the parties and the parties’ “legitimate expectations” must be respected, except in the “most exceptional cases.” As such, “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, because the bargained-for rights of the parties must be respected in almost all cases, the court jettisoned any notion that additional private interests should be weighed in the enforceability analysis. Because a valid forum selection clause itself captures the private interests of the parties at the time of contracting, the plaintiff will not be permitted to assert different interests once litigation arises. The court emphasized that in such cases courts “should not consider arguments about the parties’ private interests” and “must deem the private-interest factors to weigh entirely in favor of the preselected forum.”
- Finally, while a court may still consider the public interest in any analysis, the Supreme Court stated that because this factor “will rarely defeat a transfer motion, the practical result is that forum selection clauses should control except in unusual cases.”
In Atlantic Marine, the court made plain that the parties’ own contracted-for terms — not statutory venue provisions — will almost always govern the enforcement of forum selection clauses. In doing so, it strengthened the enforceability of such clauses and reinforced their importance in contract negotiations. Some immediate practical consequences for business and practitioners in the wake of Atlantic Marine include the following:
- Consider whether Atlantic Marine applies to an existing federal case and whether there are grounds for reconsideration at the trial level before final judgment or raising the issue on appeal.
- Since the court emphasized that the parties’ own contractual terms are the primary deciding factor, a review of existing forum selection clauses may be in order.
- The decision also highlights the importance of drafting future contracts to ensure that they fully reflect the parties’ intent, particularly any details about forum selection.