Businesses and business persons beware: the mandatory forum selection clause (MFSC) in your contract might not be as “mandatory” as you think. To elaborate:
A typical response by a defendant when a plaintiff files a complaint in a court that has proper venue under the federal law, but which forum is not the one designated in the MFSC, is to file a motion to have the lawsuit transferred to the forum named in the MFSC or, alternatively, dismissed for improper venue. There is, however, a split among the federal courts of appeals as to whether, under this circumstance, the MFSC is to be treated as binding. On April 1, 2013, the U.S. Supreme Court granted a petition for certiorari in Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc. to address this circuit split.
The Circuit Split. In Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc., 701 F.3d 736 (5th Cir. 2012), the Fifth Circuit joined the Third and Sixth Circuits in holding that federal courts do not have to treat a MFSC as mandatory in deciding motions to transfer/dismiss, where the lawsuit was filed in an otherwise proper venue. Under the law of these three circuits, such motions are to be decided following the discretionary balancing test of 28 U.S.C. § 1404(a), which gives weight to the MFSC – along with several other factors. The other factors can outweigh the MFSC, with the end result potentially being that the MFSC is not enforced. By contrast, the Second, Seventh, Eighth, Ninth, and Eleventh Circuits eschew this balancing test, and instead have held that 28 U.S.C. § 1406, Fed. R. Civ. P. 12(b)(3), and/or the test enunciated in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) govern these motions. Under that authority, a valid MFSC, generally speaking, renders venue improper in courts other than those designated in the MFSC, save for some narrow exceptions.
The Likely Impact of The Supreme Court’s Decision on Businesses and Business Persons. MFSCs are a common and important part of business today. Notably, they shape the expectations of businesses and business persons in entering contracts by providing a level of certainty regarding (1) the location and court in which future disputes concerning the contract containing the MFSC will be litigated and (2) that expenses for litigating over venue will not be incurred in the event of such a contract dispute. How the Supreme Court rules on the Atlantic Marine appeal will likely affect the extent to which federal courts will enforce MFSCs and, in turn, will likely affect the reasonableness of these business expectations.