That is the question that the Court of Appeals for the Third Circuit considered in State of New Jersey v. Merrill Lynch & Co., Inc., ___ F.3d ___ (3d Cir. 2011). The plaintiff filed suit in New Jersey state court but the defendant removed the case to federal court. The pertinent part of the forum selection clause that governed the parties’ dispute stated that “exclusive jurisdiction … shall lie in the appropriate courts of the State [of] New Jersey.” The District Court granted the plaintiff’s motion to remand and the Third Circuit affirmed. In so doing, the Third Circuit rejected the defendant’s argument that the forum selection clause contemplated jurisdiction in either state courts or federal courts that were located in New Jersey.
In January 2008, the plaintiff, a division of New Jersey’s Department of Treasury, purchased $300 million in preferred stock that was issued by the defendant, Merrill Lynch. In July 2008, the parties agreed, pursuant to a Share Exchange Agreement (“Agreement”), for the plaintiff’s shares to be converted to common stock so long as the conversion terms were as favorable as the terms that applied for other stockholders’ conversion. One year later the plaintiff filed suit in New Jersey state court, alleging that the defendant breached the Agreement because it converted another stockholder’s preferred stock on more favorable terms. The plaintiff further claimed that the defendant’s pre-conversion financial disclosures were misleading or incomplete.
The defendant removed the case to the District Court for the District of New Jersey. Its basis for removal was the “strong federal interest” in the case, and it maintained that the complaint had issues arising under the Securities Exchange Act. The plaintiff moved to remand based on the forum selection clause, asserting that it required that disputes between the parties be resolved in New Jersey’s state courts. The defendant countered that argument by claiming that the clause simply meant that any dispute had to proceed in a court located within the State of New Jersey, not necessarily a New Jersey state court. The District Court rejected the defendant’s argument, pointing out that every Court of Appeals that had considered a similar issue had ruled that jurisdiction was limited to state court, not federal tribunals. Therefore, the District Court remanded the action back to New Jersey state court.
The Third Circuit began its analysis by acknowledging that it generally does not have jurisdiction over appeals from orders that remand a case back to state court, but that its review was nonetheless appropriate because there is an exception when the remand is not based on any of the reasons identified in 28 U.S.C. § 1447(d). Evaluating whether the defendant had waived its right to remove to federal court, the Third Circuit pointed out that both parties were sophisticated organizations that had been represented by counsel during the negotiation of the forum selection clause. Specifically, the court recounted that the defendant’s initial draft had stated that suit would be brought in the United States District Court for the Southern District of New York or any New York state court in Manhattan, but that the plaintiff had objected to that language and instead proposed that exclusive jurisdiction and venue would “lie in the appropriate courts of the State [of] New Jersey.” The defendant incorporated the plaintiff’s proposal verbatim into the Agreement.
The court then rejected the defendant’s two arguments that “appropriate courts of the State [of] New Jersey” meant a state or federal court located in New Jersey. First, the defendant claimed that because the clause referred to “courts” as opposed to “court,” and because New Jersey has a unified Superior Court, the clause must have meant both state and federal courts. The Third Circuit disagreed, noting that the use of “courts” was “best read as a vestigial reference to the many tribunals comprising the Superior Court of New Jersey, not the federal district courts in the state.” Second, the Third Circuit concluded that the defendant’s contention that the word “of” denoted the geographic location of the “appropriate courts” lacked merit, pointing out that other circuit courts had rejected similar grammar-based arguments.
After distinguishing caselaw that the defendant tried to rely upon, the Third Circuit emphasized that “the vast majority of our sister circuits have held that forum selection clauses like the one at issue here required remand to the court.” Lastly, the court ruled that the forum selection clause was not ambiguous. In conclusion, the Third Circuit declared that “we find that the forum selection clause memorializes the parties’ intention to litigate all contractual disputes in the state courts of New Jersey and thus was a waiver of the right to removal.”