Enforcing Forum- Selection Clauses

The Fifth Circuit denied Atlantic Marine's petition for a writ of mandamus directing the district court to dismiss the case under Section 1406(a) or to transfer the case to the Eastern District of Virginia under Section 1404(a). The U.S. Supreme Court reversed the Fifth Circuit and remanded the case to the courts below.

Supreme Court Ruling

The U.S. Supreme Court addressed the question of the proper procedure for a defendant in a civil case to use to enforce a forum-selection clause. The Supreme Court rejected Atlantic Marine's argument that a forum-selection clause may be enforced by a motion to dismiss under 28 U.S.C. '1406(a) or Rule 12(b)(3) of the FRCP. Rather, the Supreme Court ruled that a defendant seeking to enforce a forum-selection clause may enforce the clause by a motion to transfer under 28 U.S.C. '1404(a) which provides that a district court, in the interest of justice, may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented. The “consent” portion of Section 1404(a) is applicable by virtue of the forum-selection clause consenting to the forum.

The Supreme Court also gave guidance to district courts on handling motions to transfer under Section 1404(a) based on an agreed-upon forum-selection clause. The Supreme Court concludes that when a defendant files a motion based on a forum-selection clause “a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.” 134 S. Ct. at 575. The forum-selection clause must be given “controlling weight in all but the most exceptional circumstances.” See, Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 33 (1988). There were no exceptional circumstances shown in the Atlantic Marine case.

Section 1404(a) is defendant's exclusive remedy for enforcing a forum-selection clause that points to another federal forum when venue is otherwise proper in the district where the case was brought. When the parties have agreed to a valid forum-selection clause, the Supreme Court holds a district court should ordinarily transfer the case to the forum specified in the clause. The Supreme Court also determined that district courts must adjust their usual '1404(a) analysis in the presence of a valid forum-selection clause. First, the plaintiff's choice of forum merits no weight in the analysis. Second, plaintiff bears the burden of showing why the court should not transfer the case to the forum to which the parties consented. Third, when parties agree to a forum-selection clause they waive the right to challenge the forum on inconvenience grounds. As such, the district court must weigh any private interest factors entirely in favor of the agree-upon forum. A district court may consider public-interest factors but denying a motion to transfer on these grounds the Supreme Court notes will not be common.

The Supreme Court also observes that the court in the contractually selected venue should not apply the law of the transferor venue to which the parties waived their right by agreeing upon a forum. As such, the Virginia transfer courts in this case are not required to apply Texas law to the dispute in this case even though the case was originally filed in Texas.

Finally, the Supreme Court emphasizes that in all but the most unusual cases, the “interest of justice” is served by holding parties to their bargained forum-selection clause.

Conclusion

A defendant's exclusive mechanism for enforcing a forum-selection clause is a motion to transfer under 28 U.S.C. '1404(a). District courts should grant a defendant's motion to transfer based on a forum-selection clause unless there are extraordinary circumstances unrelated to the convenience of the parties. The forum-selection clause must be given controlling weight in all but the most exceptional circumstances.

The ruling further demonstrates the importance of using forum-selection clauses in connection with e-commerce applications, and provides additional reasons favoring the use of forum-selection clauses.

J. (“Jay”) T. Westermeier is Of Counsel to Finnegan, Henderson, Farabow, Garrett & Dunner LLP, in the firm's Reston, VA, office. A member of this newsletter's Board of Editors, he is past president of the International Technology Law Association (ITech Law) (formerly known as the Computer Law Association), a Life Fellow of the American Bar Foundation, 2001 Burton Award recipient. He can be reached at [email protected].

Forum-selection clauses are commonly used in agreements for e-commerce websites. These clauses represent a very important risk management provision. See, e.g., Stomp, Inc. v. Neat O LLC, 61 F. Supp. 2d 1074, 1080-81 (C.D. Cal. 1999) (court recommending a forum-selection clause in e-commerce applications). On Dec. 3, 2013, in a 9-0 decision written by Justice Alito, the U.S. Supreme Court rendered a very significant ruling in Atlantic Marine Constructions Co., Inc. v. United States District Court for the Western District of Texas, 134 S. Ct. 568 (2013), relating to the proper procedures for enforcing forum-selection clauses. In this article, we will discuss these procedures.

The Atlantic Marine Forum-Selection Clause

Atlantic Marine Construction Co. is a Virginia corporation that had entered into a subcontract with J. Crew Management, Inc., a Texas corporation. The subcontract concerned work on a construction project at Ft. Hood, Texas and the contract included a forum-selection clause requiring that all disputes between the parties would be litigated in Virginia. However, when a dispute arose J. Crew Management filed an action in the Western District of Texas rather than in Virginia. Atlantic Marine moved to dismiss J. Crew Management's lawsuit on the grounds that the forum-selection clause rendered venue “wrong” under 28 U.S.C. '1406(a) and “improper” under Section 12(b)(3) of the Federal Rules of Civil Procedure (FRCP). Alternatively, Atlantic Marine moved to transfer the lawsuit to the U.S. District Court for the Eastern District of Virginia under 28 U.S.C. '1404(a).

The Fifth Circuit denied Atlantic Marine's petition for a writ of mandamus directing the district court to dismiss the case under Section 1406(a) or to transfer the case to the Eastern District of Virginia under Section 1404(a). The U.S. Supreme Court reversed the Fifth Circuit and remanded the case to the courts below.

Supreme Court Ruling

The U.S. Supreme Court addressed the question of the proper procedure for a defendant in a civil case to use to enforce a forum-selection clause. The Supreme Court rejected Atlantic Marine's argument that a forum-selection clause may be enforced by a motion to dismiss under 28 U.S.C. '1406(a) or Rule 12(b)(3) of the FRCP. Rather, the Supreme Court ruled that a defendant seeking to enforce a forum-selection clause may enforce the clause by a motion to transfer under 28 U.S.C. '1404(a) which provides that a district court, in the interest of justice, may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented. The “consent” portion of Section 1404(a) is applicable by virtue of the forum-selection clause consenting to the forum.

The Supreme Court also gave guidance to district courts on handling motions to transfer under Section 1404(a) based on an agreed-upon forum-selection clause. The Supreme Court concludes that when a defendant files a motion based on a forum-selection clause “a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.” 134 S. Ct. at 575. The forum-selection clause must be given “controlling weight in all but the most exceptional circumstances.” See, Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 33 (1988). There were no exceptional circumstances shown in the Atlantic Marine case.

Section 1404(a) is defendant's exclusive remedy for enforcing a forum-selection clause that points to another federal forum when venue is otherwise proper in the district where the case was brought. When the parties have agreed to a valid forum-selection clause, the Supreme Court holds a district court should ordinarily transfer the case to the forum specified in the clause. The Supreme Court also determined that district courts must adjust their usual '1404(a) analysis in the presence of a valid forum-selection clause. First, the plaintiff's choice of forum merits no weight in the analysis. Second, plaintiff bears the burden of showing why the court should not transfer the case to the forum to which the parties consented. Third, when parties agree to a forum-selection clause they waive the right to challenge the forum on inconvenience grounds. As such, the district court must weigh any private interest factors entirely in favor of the agree-upon forum. A district court may consider public-interest factors but denying a motion to transfer on these grounds the Supreme Court notes will not be common.

The Supreme Court also observes that the court in the contractually selected venue should not apply the law of the transferor venue to which the parties waived their right by agreeing upon a forum. As such, the Virginia transfer courts in this case are not required to apply Texas law to the dispute in this case even though the case was originally filed in Texas.

Finally, the Supreme Court emphasizes that in all but the most unusual cases, the “interest of justice” is served by holding parties to their bargained forum-selection clause.

Conclusion

A defendant's exclusive mechanism for enforcing a forum-selection clause is a motion to transfer under 28 U.S.C. '1404(a). District courts should grant a defendant's motion to transfer based on a forum-selection clause unless there are extraordinary circumstances unrelated to the convenience of the parties. The forum-selection clause must be given controlling weight in all but the most exceptional circumstances.

The ruling further demonstrates the importance of using forum-selection clauses in connection with e-commerce applications, and provides additional reasons favoring the use of forum-selection clauses.

J. (“Jay”) T. Westermeier is Of Counsel to Finnegan, Henderson, Farabow, Garrett & Dunner LLP, in the firm's Reston, VA, office. A member of this newsletter's Board of Editors, he is past president of the International Technology Law Association (ITech Law) (formerly known as the Computer Law Association), a Life Fellow of the American Bar Foundation, 2001 Burton Award recipient. He can be reached at [email protected].