Forum-Selection Clauses: Limitations On Enforceability

This Commentary discusses the jurisdictional limitations of forum-selection clauses, the inconsistencies with their enforceability, and the potential for the establishment of a standardized procedure to enable companies to evaluate forum-selection clauses with more certainty going forward.

Companies that do business outside their own backyards frequently rely on carefully drafted forum-selection clauses to limit their risk (reducing litigation expenses and avoiding the threat of hostile foreign laws, judges, and/or juries). Despite such documented intentions, the initial venue of all litigation is where a plaintiff files suit. And unless the plaintiff has chosen the stipulated forum, the enforceability of a forum-selection clause may be dependent on where the plaintiff commences its lawsuit. More specifically, in the Third, Fifth, or Sixth Circuit, existing case law suggests that, despite a valid, mutually agreed-upon forum-selection clause dictating venue elsewhere, litigation filed in those circuits may very well remain in those circuits' courts. However, the legal analysis, and quite possibly the result of an attempt to enforce a forum-selection clause, could be drastically different if adjudicated in the Second, Fourth, Seventh, Eighth, Ninth, Tenth, or Eleventh Circuits.

Atlantic Marine: Addressing This Split Among the Circuits

On April 1, 2013, the United States Supreme Court granted certiorari in the matter of Atlantic Marine Construction Co., Inc. v. J-Crew Management, Inc., 701 F.3d 736 (5th Cir. 2012) ("Atlantic Marine"), to hopefully resolve this conflict and provide direction and/or certainty for parties negotiating forum-selection clauses.

The SCOTUS web site1 identifies the following issues to be resolved:

Following the Court's decision in M / S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), the majority of federal circuit courts hold that a valid forum-selection clause renders venue "improper" in a forum other than the one designated by contract. In those circuits, forum-selection clauses are routinely enforced through motions to dismiss or transfer venue under Fed. R. Civ. P. 12(b)(3) and 28 U.S.C. § 1406. The Third, Fifth, and Sixth Circuits, however, follow a contrary rule. This Petition presents the following issues for review:

1. Did the Court's decision in Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), change the standard for enforcement of clauses that designate an alternative federal forum, limiting review of such clauses to a discretionary, balancing-of-conveniences analysis under 28 U.S.C. § 1404(a)?

2. If so, how should district courts allocate the burdens of proof among parties seeking to enforce or to avoid a forum-selection clause?

   Briefing is due on this matter in early summer 2013.

   Background of Atlantic Marine. Atlantic Marine involves a dispute between a general contractor (Atlantic) and a material and labor supplier (J-Crew). The two litigants entered into a contract with a forum-selection clause selecting the "Circuit Court for the City of Norfolk, Virginia or the United States District Court for the Eastern Division of Virginia, Norfolk Division" for any formal litigation. The parties did not agree, however, upon a choice-of-law clause. The project at issue was constructed in the Western District of Texas. J-Crew, having alleged that it has not been paid for work performed, filed suit in the Austin Division of the Western District of Texas. Atlantic moved for dismissal of the suit under Rule 12(b)(3) and 28 U.S.C. § 1406 and in the alternative requested that the district court transfer the matter pursuant to 28 U.S.C. § 1404(a).

   Atlantic argued that Rule 12(b)(3) and 28 U.S.C. § 1406 require the matter to be dismissed for failure to file in a proper forum (a forum not identified in the parties' contract). Atlantic has further argued that its position is supported by The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), which states that a forum-selection clause is presumptively valid and, through its language, invalidates any forum other than the forum identified in the contract. Separately, and in the alternative, Atlantic requested that the court transfer the litigation to Virginia on the basis of 28 U.S.C. § 1404(a).

   The Fifth Circuit ultimately determined that the proper procedural mechanism for removal was not Rule 12(b)(3) and 28 U.S.C. § 1406 (requiring dismissal) but that under 28 U.S.C. § 1404(a), it should perform...