Wednesday, April 9, 2014

U.S. Supreme Court Clarifies Procedure for Enforcing Forum-Selection Clauses

The United States Supreme Court recently provided clarity to enforcement of forum-selection clauses.  In Atlantic Marine Construction Company v. United States District Court for the Western District of Texas, the Court held that, absent extraordinary circumstances unrelated to the convenience of the parties, a motion to transfer to a venue specified in a valid forum-selection clause should be granted.

The controversy arose when general contractor Atlantic Marine Construction Company (“AMC”) refused to pay its subcontractor, J-Crew Management Inc. (“J-Crew”), pursuant to a valid $160,000 construction agreement.  All of the construction took place in Texas, but the agreement contained a forum selection clause that provided that disputes would be litigated in Norfolk, Virginia.  Despite the provision, J-Crew filed suit in a Texas federal court.

AMC filed several motions seeking to enforce the forum selection clause.  First, AMC filed a FRCP 12(b)(3) motion to dismiss for improper venue.  AMC also moved for dismissal under 28 USC § 1406, alleging venue was defective.  Alternatively, AMC sought to have the case transferred pursuant to 28 USC § 1404.

The Texas district court denied AMC’s motions to dismiss and its motion to transfer, finding that AMC failed to prove that transfer would advance the interests of any of justice, the parties, or the witnesses.  The Fifth Circuit Court of Appeals refused to hear AMC’s appeal, but the United States Supreme Court granted certiorari.

Prior to this decision, the United States Circuit Courts of Appeals were divided in their approach to enforcing forum selection clauses.  Courts of Appeals in the Second, Fourth, Seventh, and Eighth Circuits generally held forum selection agreements to be universally enforceable when challenged under FRCP 12(b)(3) and 28 USC § 1406.  The Third, Fifth, and Sixth Circuits, however, held that federal law, not contractual agreements, controlled venue, and that a forum-selection clause could be a factor that judges could consider when ruling on motions to transfer under 28 USC § 1404.

In an opinion written by Justice Samuel Alito, the Court unanimously held that courts presented with challenges to venue due to a valid forum selection clause should be analyzed under 28 USC § 1404, rather than FRCP 12(b)(3) or 28 USC § 1406.  The Court further stated that motions to transfer should be granted when the parties have agreed to a valid forum-selection clause, except under extraordinary circumstances unrelated to the convenience of the parties.  Additionally, the 28 USC § 1404 balancing test should include three factors: (1) a court should not place any weight on the plaintiff’s choice of forum; (2) only the public’s interest in favor of changing venue should be considered, not the parties’; and (3) if a party initiates a lawsuit in a venue that is not agreed upon, that party shall not benefit from choice-of-law rules of that venue.

The decision is noteworthy for several reasons.  It is the first time the Court has taken up the issue enforceability of forum-selection clauses in over two decades.  Second, the opinion reflects the Court’s deference to negotiated agreements between parties, similar to enforceable arbitration clauses.  Finally, this decision clarifies what is the proper procedural mechanism for enforcing forum-selection clauses, and suggests that enforcement of these agreements will be much easier.

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