A Victory for Forum-Selection Clauses

Procedural History

Atlantic filed a motion to dismiss the action filed by J-Crew asserting that the forum-selection clause resulted in the venue in the Western District of Texas being “wrong” pursuant to 28 U.S.C. ' 1406(a) and “improper” under Federal Rule of Civil Procedure 12(b)(3). Alternatively, Atlantic moved to have the case transferred to the Eastern District of Virginia consistent with 28 U.S.C. '1404(a). Not surprisingly, J-Crew opposed both motions.

The lower court denied both motions. In rendering its decision, the United States District Court for the Western District of Texas concluded that: 1) ' 1404(a) is the exclusive vehicle for enforcing a forum-selection clause; and 2) it was Atlantic's burden to prove that a transfer was appropriate pursuant to ' 1404(a).

Atlantic then petitioned the Court of Appeals to dismiss the action filed by J-Crew or in the alternative to transfer the case to the Eastern District of Virginia under ' 1404(a). The Court of Appeals rejected the petition to dismiss and agreed with the lower court that ' 1404(a) was the correct method for transferring the case. In reviewing the lower court's application of ' 1404(a), the Court of Appeals concluded that the lower court had not abused its discretion in refusing to transfer the case after applying a balance-of-interests analysis. The Supreme Court agreed to grant certiorari.

The Court's Opinion

In analyzing the case at bar, the Supreme Court first made it clear that attempting to enforce a forum-selection clause by way of a motion to dismiss pursuant to ' 1406(a) and/or 12(b)(3) was incorrect. The Court reasoned that both ' 1406(a) and/or 12(b)(3) are relevant when venue is “wrong” or “improper.” In order to determine whether venue is “wrong” or “improper,” one must look to 28 U.S.C. ' 1391 (2006 ed., Supp. V). '1391(b) lists three possible categories for proper venue: 1) a judicial district in which any defendant resides, if all defendants are residents of the State in which the district is located; 2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated; or 3) if there is no district in which an action may otherwise be brought as provided in this section, any judicial district in which a defendant is subject to the court's personal jurisdiction with respect to such action. If none of these three apply, there cannot be proper venue and the case must be dismissed or transferred pursuant to ' 1406(a). However, a forum-selection clause will not affect the applicability of whether proper venue lies, and therefore ' 1406(a) and 12(b)(3) are not applicable.

Having rejected the ability of Atlantic to request relief pursuant to ' 1406(a) and 12(b)(3), the Court turned to ' 1404(a). According to the Court, it is ' 1404(a) that provides the mechanism by which a party can attempt to enforce a forum-selection clause. When reviewing a motion to transfer under ' 1404(a), that does not involve a forum-selection clause, the Court will evaluate the convenience of the parties and the public interest.

However, a different analysis occurs when deciding a motion pursuant to ' 1404(a) in the context of a forum-selection clause. A valid forum-selection clause which is bargained by the parties needs to be given its proper weight under the circumstances and when applied pursuant to ' 1404(a) should only be overturned in “'exceptional cases.'” Atlantic Marine Constr. Co., 134 S. Ct. 568, *579, citing Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988) (Court ruled that federal law applies to determination whether forum-selection clause should require transfer, not state law where case was brought).

According to the Court, the lower courts need to take three important factors into consideration when deciding motions to transfer under ' 1404(a) and faced with a valid forum-selection clause. First, it is irrelevant which forum the plaintiff chose. It is up to the plaintiff to prove why transferring the case to the forum originally contemplated is not correct. Although a plaintiff normally has a forum privilege, this privilege is waived when the plaintiff has already entered into an arms-length contract consenting to a particular forum.

Second, while it is normally proper to consider the parties' private interests in reviewing a motion pursuant to ' 1404(a), this is not the case when dealing with a forum-selection clause. Frequently, courts will look to the location of witnesses and/or the convenience of the parties. However, by agreeing to a forum-selection clause, the party that may attempt to file in another jurisdiction and argue inconvenience is estopped from doing so because it had the ability to foresee what jurisdiction they would be required to litigate in. Therefore, only matters of public interest may be considered.

Third, the party violating the forum-selection clause should not have the right to the choice-of-law rules. While there may normally be exceptions for parties filing in one jurisdiction allowing them to apply the choice-of-law from the original jurisdiction in the transferee court after the allowance of a ' 1404(a) transfer, no such exception should apply with a valid forum-selection clause, since the party that has violated the clause has lost its privilege.

What Does Atlantic Marine Mean for Equipment Lessors?

It is clear from a reading of the Supreme Court's decision in Atlantic Marine, that a party that attempts to thwart a valid forum-selection clause by filing in a different jurisdiction should be prepared for the transfer of its case to the agreed upon jurisdiction. Moreover, the party that ignores a forum-selection clause will not receive the benefit of having the state law of the original court applied in the court where the action is transferred.

Equipment lessors who rely on forum selection clauses to control litigation in equipment lease agreements that span multiple jurisdictional venues should be aware of this recent ruling from the U.S. Supreme Court that strongly favors enforcing valid forum selection clauses. The ruling requires defendants to enforce forum selection clauses through motions to transfer under 28 U.S.C. ' 1404(a) and overturns a majority rule that allowed defendants to enforce the clauses through motions to dismiss under Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. ' 1406(a). However, the holding also places a heavy burden on plaintiffs that breach valid forum selection clauses by suing in forums other than those designated by their agreements.

A Must-Read

The Supreme Court opinion is a must-read and points out that forum-selection clauses should be enforced absent extraordinary circumstances.

The Court appears to uphold the enforceability of forum selection clauses, which permit contracting parties to prospectively determine the location/court where a lawsuit will be adjudicated in the event of a dispute. In cases where a plaintiff disregards the jurisdictional clause by filing suit in a federal court in its home state, the Supreme Court signaled it will streamline the process for the defending party to dismiss the lawsuit or transfer it to the contractually specified federal forum. This would provide some much-needed predictability for businesses that routinely conduct business across state lines and rely on forum selection clauses to control litigation costs accordingly.

Conclusion

Atlantic Marine will reinforce the necessity for parties not wanting to adhere to the forum selection clause to keep disputes out of federal court. Keep in mind that the ruling in Atlantic Marine will be limited to deciding what procedure must be utilized to request dismissal/transfer when a lawsuit is filed in an otherwise proper federal court but in contravention of a forum selection clause that specifies lawsuits must be filed in a different federal forum. The case will not affect state court procedure whatsoever. State courts faced with these lawsuits are far more likely to honor their state's public policy and may refuse to enforce the forum selection clause.

Lewis J. Cohn, a member of this newsletter's Board of Editors, is the Managing Partner of Cohn & Dussi, LLC. He heads the equipment leasing and bankruptcy departments and is a member of the firm's creditor's rights department. John T. Precobb is a Senior Associate at the firm. Precobb concentrates his practice on commercial and complex litigation, including representation of equipment leasing companies as well as secured lenders in state court, federal court and bankruptcy court.

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A recent United States Supreme Court decision, Atlantic Marine Construction, Inc. v. United States District Court for the Western District of Texas, et al, 134 S. Ct. 568, overturns both the United States District Court for the District of Western Texas and the U.S. Court of Appeals for the Fifth Circuit. After rejecting the legal analysis applied in both the lower court and the appeals court, the Supreme Court concluded that where two parties enter into a contract which contains a forum-selection clause and one party attempts to file an action in a jurisdiction not covered by the forum-selection clause: 1) the party defying the clause has the burden of proving that the forum bargained for is inappropriate; 2) when analyzing whether the venue is proper, there is no consideration to be given to the parties' private interests; and 3) although it is typical to apply the state law of the original court to the transferee court when a transfer of venue occurs, this exception to the choice of law rule shall not apply when dealing with a valid forum-selection clause.

Factual Background

The Petitioner, Atlantic Marine Construction Co. (“Atlantic”), a Virginia corporation, has a principal place of business in Virginia. It entered into a contract with the United States Army Corps of Engineers to build a child-development center at Fort Hood, TX. Atlantic subcontracted with J-Crew Management, Inc. (“J-Crew”) to complete the project. The contract between Atlantic and J-Crew contained a forum-selection clause that provided, inter alia, that any disputes between the parties “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.” When a dispute regarding payment arose, J-Crew filed an action in the Western District of Texas claiming diversity jurisdiction.

Procedural History

Atlantic filed a motion to dismiss the action filed by J-Crew asserting that the forum-selection clause resulted in the venue in the Western District of Texas being “wrong” pursuant to 28 U.S.C. ' 1406(a) and “improper” under Federal Rule of Civil Procedure 12(b)(3). Alternatively, Atlantic moved to have the case transferred to the Eastern District of Virginia consistent with 28 U.S.C. '1404(a). Not surprisingly, J-Crew opposed both motions.

The lower court denied both motions. In rendering its decision, the United States District Court for the Western District of Texas concluded that: 1) ' 1404(a) is the exclusive vehicle for enforcing a forum-selection clause; and 2) it was Atlantic's burden to prove that a transfer was appropriate pursuant to ' 1404(a).

Atlantic then petitioned the Court of Appeals to dismiss the action filed by J-Crew or in the alternative to transfer the case to the Eastern District of Virginia under ' 1404(a). The Court of Appeals rejected the petition to dismiss and agreed with the lower court that ' 1404(a) was the correct method for transferring the case. In reviewing the lower court's application of ' 1404(a), the Court of Appeals concluded that the lower court had not abused its discretion in refusing to transfer the case after applying a balance-of-interests analysis. The Supreme Court agreed to grant certiorari.

The Court's Opinion

In analyzing the case at bar, the Supreme Court first made it clear that attempting to enforce a forum-selection clause by way of a motion to dismiss pursuant to ' 1406(a) and/or 12(b)(3) was incorrect. The Court reasoned that both ' 1406(a) and/or 12(b)(3) are relevant when venue is “wrong” or “improper.” In order to determine whether venue is “wrong” or “improper,” one must look to 28 U.S.C. ' 1391 (2006 ed., Supp. V). '1391(b) lists three possible categories for proper venue: 1) a judicial district in which any defendant resides, if all defendants are residents of the State in which the district is located; 2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated; or 3) if there is no district in which an action may otherwise be brought as provided in this section, any judicial district in which a defendant is subject to the court's personal jurisdiction with respect to such action. If none of these three apply, there cannot be proper venue and the case must be dismissed or transferred pursuant to ' 1406(a). However, a forum-selection clause will not affect the applicability of whether proper venue lies, and therefore ' 1406(a) and 12(b)(3) are not applicable.

Having rejected the ability of Atlantic to request relief pursuant to ' 1406(a) and 12(b)(3), the Court turned to ' 1404(a). According to the Court, it is ' 1404(a) that provides the mechanism by which a party can attempt to enforce a forum-selection clause. When reviewing a motion to transfer under ' 1404(a), that does not involve a forum-selection clause, the Court will evaluate the convenience of the parties and the public interest.

However, a different analysis occurs when deciding a motion pursuant to ' 1404(a) in the context of a forum-selection clause. A valid forum-selection clause which is bargained by the parties needs to be given its proper weight under the circumstances and when applied pursuant to ' 1404(a) should only be overturned in “'exceptional cases.'” Atlantic Marine Constr. Co. , 134 S. Ct. 568, *579, citing Stewart Organization, Inc. v. Ricoh Corp. , 487 U.S. 22 (1988) (Court ruled that federal law applies to determination whether forum-selection clause should require transfer, not state law where case was brought).

According to the Court, the lower courts need to take three important factors into consideration when deciding motions to transfer under ' 1404(a) and faced with a valid forum-selection clause. First, it is irrelevant which forum the plaintiff chose. It is up to the plaintiff to prove why transferring the case to the forum originally contemplated is not correct. Although a plaintiff normally has a forum privilege, this privilege is waived when the plaintiff has already entered into an arms-length contract consenting to a particular forum.

Second, while it is normally proper to consider the parties' private interests in reviewing a motion pursuant to ' 1404(a), this is not the case when dealing with a forum-selection clause. Frequently, courts will look to the location of witnesses and/or the convenience of the parties. However, by agreeing to a forum-selection clause, the party that may attempt to file in another jurisdiction and argue inconvenience is estopped from doing so because it had the ability to foresee what jurisdiction they would be required to litigate in. Therefore, only matters of public interest may be considered.

Third, the party violating the forum-selection clause should not have the right to the choice-of-law rules. While there may normally be exceptions for parties filing in one jurisdiction allowing them to apply the choice-of-law from the original jurisdiction in the transferee court after the allowance of a ' 1404(a) transfer, no such exception should apply with a valid forum-selection clause, since the party that has violated the clause has lost its privilege.

What Does Atlantic Marine Mean for Equipment Lessors?

It is clear from a reading of the Supreme Court's decision in Atlantic Marine, that a party that attempts to thwart a valid forum-selection clause by filing in a different jurisdiction should be prepared for the transfer of its case to the agreed upon jurisdiction. Moreover, the party that ignores a forum-selection clause will not receive the benefit of having the state law of the original court applied in the court where the action is transferred.

Equipment lessors who rely on forum selection clauses to control litigation in equipment lease agreements that span multiple jurisdictional venues should be aware of this recent ruling from the U.S. Supreme Court that strongly favors enforcing valid forum selection clauses. The ruling requires defendants to enforce forum selection clauses through motions to transfer under 28 U.S.C. ' 1404(a) and overturns a majority rule that allowed defendants to enforce the clauses through motions to dismiss under Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. ' 1406(a). However, the holding also places a heavy burden on plaintiffs that breach valid forum selection clauses by suing in forums other than those designated by their agreements.

A Must-Read

The Supreme Court opinion is a must-read and points out that forum-selection clauses should be enforced absent extraordinary circumstances.

The Court appears to uphold the enforceability of forum selection clauses, which permit contracting parties to prospectively determine the location/court where a lawsuit will be adjudicated in the event of a dispute. In cases where a plaintiff disregards the jurisdictional clause by filing suit in a federal court in its home state, the Supreme Court signaled it will streamline the process for the defending party to dismiss the lawsuit or transfer it to the contractually specified federal forum. This would provide some much-needed predictability for businesses that routinely conduct business across state lines and rely on forum selection clauses to control litigation costs accordingly.

Conclusion

Atlantic Marine will reinforce the necessity for parties not wanting to adhere to the forum selection clause to keep disputes out of federal court. Keep in mind that the ruling in Atlantic Marine will be limited to deciding what procedure must be utilized to request dismissal/transfer when a lawsuit is filed in an otherwise proper federal court but in contravention of a forum selection clause that specifies lawsuits must be filed in a different federal forum. The case will not affect state court procedure whatsoever. State courts faced with these lawsuits are far more likely to honor their state's public policy and may refuse to enforce the forum selection clause.

Lewis J. Cohn, a member of this newsletter's Board of Editors, is the Managing Partner of Cohn & Dussi, LLC. He heads the equipment leasing and bankruptcy departments and is a member of the firm's creditor's rights department. John T. Precobb is a Senior Associate at the firm. Precobb concentrates his practice on commercial and complex litigation, including representation of equipment leasing companies as well as secured lenders in state court, federal court and bankruptcy court.

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