In a 2007 Kramer Levin Intellectual Property (KLIP) Alert, we wrote about the scope and coverage of contractual forum selection clauses and how they may preclude a suit from being successfully brought in another jurisdiction. (Copies of the earlier Alert are available on request.) Now, the Supreme Court of the United States has weighed in on the issue of what happens when a suit is brought in a forum other than the one designated in the contract, holding that a valid forum selection clause “should be given controlling weight in all but the most exceptional cases,” and explaining that a motion to transfer is the proper mechanism for a defendant to challenge the filing of a suit in breach of the clause. Atlantic Marine Constr. Co. v. U.S. Dist. Court for the Western Dist. Of Tex. (Dec. 3, 2013).
The forum selection clause in the contract in the Atlantic Marine case recited that all disputes between the parties “shall be litigated in the circuit court for the city of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.” When a payment dispute arose between the parties, J-Crew Management, Inc., ignored the forum provision and filed suit against Atlantic Marine in the United States District Court for the Western District of Texas. Atlantic Marine moved to dismiss or transfer the case to the Eastern District of Virginia. The District Court denied the motion, notwithstanding the forum selection clause, and the Fifth Circuit refused to grant a writ of mandamus.
The Supreme Court opinion deals mostly with the proper technical procedure for moving a case from the federal district in which suit was filed to the federal district agreed to by the parties in the forum selection clause. Resolving an issue that has divided the lower federal courts, the Supreme Court held that the proper procedure is to make a motion to transfer the action (as opposed to moving to dismiss the action for improper venue). The Supreme Court explained that a contractual venue selection provision does not alter which federal districts would be a proper venue under the federal venue statute—only Congress can determine the requirements for venue in the federal district courts. Nonetheless, a valid forum selection clause can effectively determine in which forum a dispute between contract parties will be heard. To make sure this happens, the Supreme Court directed district courts to significantly adjust the calculus used in evaluating the merits of a transfer motion prompted by a forum selection clause by:
- giving no weight to the forum chosen by the plaintiff (a departure from the usual rule that plaintiff’s choice is given great weight);
- refusing to allow the plaintiff to argue that the contractually agreed-to forum is now (perhaps years later) inconvenient or less-convenient; instead, the agreed-to forum is presumptively convenient and only public-interest factors, if any, may be considered; and
- refusing to apply the original forum’s choice-of-law rules, explaining that a party who flouts its contractual obligation should not benefit from forum shopping.
Atlantic Marine involved the enforcement of a forum selection clause as between different federal districts. But, the Supreme Court also addressed the situation where the forum selection clause specifies that suit be brought in a state court or a foreign forum (which could include an arbitral forum) and, yet, the plaintiff filed an action in a federal district court. The Court spelled out the proper procedure for seeking dismissal of such a federal court action—a forum non conveniens motion—and, importantly, said that the same adjustments to the calculus used on a transfer motion should be applied in this other context.
In short, the Supreme Court ruling recognizes that a plaintiff who files suit in a forum other than the one agreed to by the parties in a contract should be given no advantage in opposing a motion to transfer to the designated venue.Rather, the parties should be held to their agreement on the forum absent highly unusual circumstances.
Because the lower federal courts had reached conflicting approaches for enforcing forum selection clauses, the first take-away from this new decision is that the cost of enforcing forum selection clauses should come down, because the Supreme Court has eliminated the conflict and clearly signaled that forum selection clauses should be enforced. A broader take-away is that contract parties should carefully craft their forum selection clauses to limit the risk of litigation over the effect of the particular forum selection clause. In particular, it is preferable to make explicit that the forum selection clause is designating an exclusive and mandatory forum for any law suit (as was done in the language from Atlantic Marine quoted above). Parties should also use language that reaches all aspects of a dispute, not simply claims arising from the agreement (that is, reaching related statutory or common law claims). In this way, a contract party can reasonably expect that the forum selection clause will govern any dispute and will be promptly enforced in federal court.