John Doroghazi

Supreme Court Strengthens Forum Selection Clauses

December 17, 2013 Advisory

Contracts often include forum selection clauses, which provide that any litigation relating to the contract (or, depending on the wording, the parties' entire relationship) may only be brought in a certain state or federal court. The potential advantages of a forum selection clause are numerous. For example, a forum selection clause can prevent having to litigate far from one's home court, help keep litigation costs down, and minimize the inconvenience to employees who are witnesses in the litigation. Yet, plaintiffs often ignore forum selection clauses and bring lawsuits wherever they see fit. In federal court, defendants then often attempt to have the lawsuit transferred to the forum chosen in the contract under 28 U.S.C. § 1404(a), the federal venue transfer statute that allows a transfer to a different federal venue "for the convenience of parties and witnesses, in the interest of justice." Federal courts decide 1404(a) motions by weighing various public and private interest factors. While federal courts considered a forum selection clause a "significant factor" in deciding whether to transfer a case, it was still just one of many factors to consider. In a decision two weeks ago, Atlantic Marine Construction Co. v. Western District of Texas (12-929), the U.S. Supreme Court made clear that if a forum selection clause is valid, the case should be adjudicated in the parties' chosen forum.

In Atlantic Marine, a Virginia-based contractor entered into a sub-contract with a Texas-based company. The subcontract contained a forum selection clause providing that disputes between the parties "shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or in the United States District Court for the Eastern District of Virginia, Norfolk Division." But when a dispute arose, the subcontractor ignored the clause and sued in a federal district court in Texas. The contractor moved, among other things, to have the case transferred under § 1404(a) to a Virginia federal district court. Even though both parties agreed that the forum selection clause was valid, the Texas district court, and then the Fifth Circuit Court of Appeals, held that the transfer was not appropriate in light of various public and private interest factors under a typical §1404(a) transfer analysis.

In a unanimous decision, the Supreme Court reversed the lower court's decision and held that "when the parties have agreed to a valid forum selection clause, the district court should ordinarily transfer the case to the forum specified in that clause." It emphasized that § 1404(a) in fact requires that a valid forum-selection clause be "given controlling weight in all but the most exceptional cases." The Supreme Court also noted that in weighing the various § 1404(a) factors, the convenience of the parties should not be weighed because by agreeing to the forum selection clause, they have contractually agreed that the chosen forum is the most convenient one. The Supreme Court went on to explain that because public interest factors "will rarely defeat a transfer motion, the practical result is that forum-selection clauses should control except in unusual cases." Finally, the Supreme Court also explained that courts should apply this same analysis (though under the doctrine of forum non conveniens) to valid forum selection clauses pointing to specific state or foreign forums.

Going forward, any party entering into a contract should pay close attention to what forum is chosen in the contract because it is now highly likely that any dispute will end up in the contractually chosen forum. In addition, the Supreme Court's decision is also likely to place the focus in venue disputes squarely on whether the clause itself is valid, an already often-litigated question that was not addressed in Atlantic Marine. Thus, parties that include forum selection clauses in their form contracts should be especially cautious when drafting them to avoid making them so onerous that a court will find them unconscionable or otherwise in violation of public policy. In addition, the forum selection should be obvious and conspicuous in its presentation and, appropriately, the subject of pre-execution disclosure.