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Seventh Circuit Finds 'Floating' Forum Selection Clauses Valid
The sale of individual equipment leases from one equipment lessor to another, or entire portfolios of equipment leases, is common practice in the United States. One component that parties interested in purchasing equipment leases or portfolios of equipment leases desire in the equipment lease contract is a choice of forum clause that provides the flexibility for the purchasing party to initiate litigation in its own home state. However, the enforceability of forum selection clauses providing for one or more appropriate forums has been the question of some debate both in the federal and state courts. Recently, the Seventh Circuit Court of Appeals issued an opinion coming down squarely in favor of the enforceability of such forum selection clauses.
In the fall of 2003, Norvergence, Inc. ('Norvergence') was a seemingly fast-growing, highly profitable telecommunications company. Norvergence contracted with thousands of small- to mid-size businesses throughout the United States, entering into Equipment Rental Agreements ('ERAs') for the lease of telecommunications equipment that was deemed to be proprietary, cutting-edge, and to be used in conjunction with telecom services that Norvergence would provide. After entering into an ERA, Norvergence would sell the payment rights under the ERA to a third-party leasing company. Norvergence retained all service obligations under the ERAs, and the ERAs provided that the lessees' payments under the leases to any subsequent assignee were unconditional. Additionally, the ERAs were fully integrated contracts, providing that there were no side agreements outside of the ERAs, that oral promises not contained in the ERAs cannot be enforced, and that the ERAs can only be modified by written agreement. Lease finance companies could not get enough of the ERAs into their portfolios, and lined up to take assignments of them from Norvergence. It was not until Norvergence collapsed into bankruptcy that these companies realized that they had the makings of a vendor financing fiasco on their hands. As lessee after lessee stopped making their payments under the ERAs when Norvergence became unable to provide them the promised telecommunications services, lease finance companies found themselves holding portfolios with astronomical delinquency rates and the prospect of protracted litigation to protect their investment.
As if mass defaults were not bad enough, when the lease finance companies began to pursue enforcement of the ERAs, they realized they had another, completely unforeseen problem; the ERA assignees found themselves faced with unprecedented opposition to the forum selection clauses contained in the ERAs. The ERAs have 'floating' forum selection clauses that shift venue upon assignment to the state in which the subsequent assignee's principal office is located. The clauses provide:
APPLICABLE LAW: This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which Rentor's principal offices are located or, if this Lease is assigned by Rentor, the State in which the assignee's principal offices are located, without regard to such State's choice of law considerations and all legal actions relating to this Lease shall be venued exclusively in a state or federal court located within that State, such court to be chosen at Rentor or Rentor's assignee's sole option. You hereby waive right to a trial by jury in any lawsuit in any way relating to this rental.
The 'floating' forum selection clauses are obviously attractive in that because venue shifts upon assignment, an assignee does not have to sue a defaulting lessee in a distant forum and instead can file suit in the state where its principal offices are located. Clearly, the conveniences associated with these 'floating' forum selection clauses render the paper easily transferable and appealing to third-party financing companies. However, when the lease finance companies went to suit in their home jurisdictions based upon this clause they found a formidable collection of courts and state and federal agencies arrayed against them, all making one form or the other of an argument that the forum selection clauses were unenforceable because they were confusing or unclear, and thus violated one statute or another, or public policy.
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