Fasano v. Li., No. 18-100-cv (2d Cir. Apr. 12, 2019) [click for opinion]

Plaintiffs sued Defendants, purchasers of American Depository Shares ("ADSs"), for damages in connection with a "going private merger," claiming that the consideration which Defendants paid was grossly unfair. The U.S. District Court for the Southern District of New York dismissed on the grounds of forum non conveniens, holding that the Cayman Islands provided a better forum, without addressing or mentioning the mandatory forum selection clause set forth in the ADSs.

The Second Circuit held that the district court abused its discretion in not considering the forum selection clause and any impact on the forum non conveniens analysis. The Second Circuit observed that a forum selection clause substantially modifies the forum non conveniens doctrine, and gives way to a rebuttable presumption that the clause is enforceable.

The Second Circuit explained that a district court must consider three factors in determining whether the presumption of enforceability applies to a forum selection clause: whether (1) the clause was reasonably communicated to the party resisting its enforcement; (2) the clause is mandatory or permissive; and (3) the claims and parties to the dispute are subject to the clause. If the district court concludes that the presumption applies, it must then consider a fourth factor—whether the presumption of enforceability has been properly rebutted by a sufficiently strong showing that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.

Defendants acknowledged that the receipts for the ADSs contained a mandatory forum selection clause. However, the district court did not address or even mention the forum selection clause and did not consider whether enforcement of the clause would be unreasonable or unjust. Instead, it engaged in the traditional forum non conveniens analysis, without any consideration of the forum selection clause. The Second Circuit held this was an abuse of discretion.

On appeal, Defendants made two arguments with respect to the forum selection clause. First, they claimed that Plaintiffs waived their reliance on the forum selection clause by failing to raise the issue in the district court. The record, however, was clearly to the contrary. Second, Defendants argued that the scope of the clause did not cover the key defendants and claims here. The Second Circuit noted that the presumption of enforceability may apply to non‐signatories. However, because this issue was not addressed below, the Second Circuit explained that it would be better considered by the district court in the first instance.

Accordingly, the Second Circuit remanded to the district court to determine whether the presumption of enforceability arises with respect to the clause at issue, including with respect to non-signatories, and whether the presumption has been rebutted as unreasonable, unjust, or the product of fraud or overreaching.