Contractual forum selection clauses—i.e., provisions selecting specific courts for subsequent related litigation—abound in technology, manufacturing, and transportation commercial agreements. Oftentimes, manufacturers, suppliers, vendors, service-providers, and the like designate particular courts to lessen the costs of future litigation, as well as the likelihood of judicial error. For example, contractors often select courts familiar and competent with the relevant law, industry, or agreement. Similarly, they often seek litigation forums near relevant facilities, witnesses, vessels, and other facts crucial to their anticipated concerns.
Despite their prevalence, however, (and indeed to the surprise of many) fundamental questions remain about whether and when federal courts will actually enforce forum selection clauses.
Under current law, the federal courts’ most typical approach to enforcing an otherwise valid forum selection clause is to consider it along with other factors which Congress has prescribed by statute to determine where the appropriate litigation venue lies. These factors include the “convenience of parties and witnesses,” as well as “the interests of justice.” In most instances, the existence of any otherwise valid forum selection clause will skew the consideration of these other factors toward the forum chosen in the clause. But what happens when these other factors are ignored and the only reason for enforcing an otherwise valid forum selection clause is the clause itself?
This is the question considered by the U.S. Supreme Court this month in Atlantic Marine Constr. Co. v. U.S. Dist. Court, No. 12-929. The case asks the High Court to decide whether a party seeking to enforce a forum selection clause needs any other reason to do so than the clause itself.
In Atlantic Marine, a lower court has refused to enforce a valid forum selection clause because the defendant moved to dismiss or transfer venue solely on the basis of a forum selection clause (rather than present any other argument or evidence on the other factors prescribed statute). On appeal, that defendant argues it should not have been imposed with the burden of presenting additional evidence or arguments to establish propriety of a venue which had already been chosen between the parties in an undisputedly valid contract and where no third parties are claiming any inconvenience in the clause’s chosen venue.
The defendant’s argument harkens back to a longstanding precedent, The Brenen v. Zapata Off-shore Co., 407 U.S. 1, 12 (1972), where the Supreme Court chided lower courts for refusing to enforce forum selection clauses. The Brenen regarded forum selection clauses as prima facie valid and enforceable “unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances.” Thus, the defendant argues, The Brenen requires that an otherwise valid forum selection clause must be enforced when there are no circumstances offered which militate against enforcement.
In response, the plaintiff argues a more recent precedent, Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), requires a different result. According to Stewart, the existence of the clause is but one consideration among all of the factors prescribed by statute in determining venue, and, as such, is insufficient by itself to carry the burden a defendant undertakes in proving impropriety of the venue where the plaintiff has filed suit.
Importantly, two current justices, Justice Kennedy and Justice Scalia, opined in Stewart. There, Justice Kennedy instructed lower courts to accept and use The Brenen’s rationale for enforcing the clauses—that the practical realities of modern commerce justify “rules that support private parties who negotiate” forum selection clauses so as to give them “controlling weight in all but the most exceptional cases.” In contrast, Justice Scalia reasoned that federal law does not properly address the question of whether or not a particular contractual clause is valid, as such a question falls to the substantive laws of the states, which should govern whether the clause is in fact enforceable, even when undisputed among the parties.
Atlantic Marine is thus primed for a revival of the quarter-century-old dispute between Justices Kennedy and Scalia in Stewart. Regardless of which, if either approach the Court’s opinion favors, the precedent will ultimately be important to technology, manufacturing, and transportation businesses. Allowing federal courts discretion not to enforce otherwise valid forum selection clauses will give commercial contractors an increased incentive to race to favorable courthouses, especially when the agreement lacks a choice of law clause. In such cases, the governing substantive law may be determined by where suit is filed. It would also undermine parties who have already spent valuable time negotiating to select particularly competent courts or particularly convenient locations for litigation.
The Court’s decision is expected next spring.
For additional information, please contact Joe Orlet.