U.S. Supreme Court Provides Clarity on Enforcement of Forum-Selection Clauses

In a decision likely to provide the business community with a greater degree of certainty regarding forum-selection clauses and venue for lawsuits, the U.S. Supreme Court recently addressed the procedurals available to a defendant in a civil case who seeks to enforce a forum-selection clause.  In a unanimous decision, the Supreme Court held in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, No. 12-929,  that if a case is filed in a federal district court that is authorized by statute, a forum-selection clause may be enforced by a motion to transfer venue under 28 U.S.C. § 1404(a).

Atlantic Marine Construction Co., Inc. ("Atlantic"), a Virginia corporation, entered into a subcontract agreement with J-Crew Management ("J-Crew"), a Texas corporation, for a building project.  The agreement contained a forum-selection clause which required all disputes to be litigated in state or federal court in Norfolk, Virginia.  After a dispute arose, J-Crew filed suit against Atlantic in federal court in Texas.  Atlantic invoked the forum-selection clause and moved to dismiss the suit contending that the parties' forum-selection clause rendered venue in Texas "wrong" under 28 U.S.C. § 1406(a) and "improper" under Federal Rule of Civil Procedure 12(b) (3).  Alternatively, Atlantic moved to transfer the action to federal court in Virginia under § 1404(a).

The Texas District Court denied both of Atlantic's motions.  The Texas District Court concluded that § 1404(a) was the exclusive mechanism for enforcing a forum-selection clause that chose another federal forum.  The Texas District Court further concluded that Atlantic bore the burden of establishing that § 1404(a)'s "public and private interest factors" weighed in favor of transfer, and that Atlantic failed to carry that burden.  The Fifth Circuit Court of Appeals denied Atlantic's petition for writ of mandamus, holding that the Texas District Court did not clearly abuse its discretion in weighing the public and private interests required under § 1404(a).

The Supreme Court reversed and remanded, holding that a party to a contract may enforce a forum-selection clause by a motion to transfer under § 1404(a).  The Court held that § 1406(a) and Rule 12(b) (3) allow dismissal only when venue is "wrong" or "improper," respectively.  Where a party files suit in a federal district court venue other than that specified in the forum-selection clause, the Court reasoned that does not render venue "wrong" or "improper." This is true because under 28 U.S.C. § 1391, which governs venue generally, "whether the parties entered into a contract containing a forum selection clause has no bearing on whether a case falls into one of the [three] categories of cases listed in § 1391(b)" that provides where a civil action may be brought.  In other words, a court determines whether venue is "wrong" or "improper" based on federal venue requirements as set forth in § 1391—not private contract provisions.

The Court confirmed that a defendant can, however, enforce a forum-selection clause selecting a federal forum through a motion to transfer under § 1404(a).  Unlike § 1406(a), § 1404(a) does "not condition transfer on the initial forum's being "wrong.'"  Rather, it allows transfer to any district where venue is proper or where the parties have agreed by contract to litigate.  Section 1404(a) codifies the forum non conveniens doctrine for those cases in which the transferee forum is within the federal court system.  For cases where the transferee forum is a state forum, the forum non conveniens doctrine remains available.

The Court also described the "adjustments required in a § 1404(a) analysis when the transfer motion is premised on a forum-selection clause."  The Court held that "[o]nly under extraordinary circumstances unrelated to the convenience of the parties should a § 1404(a) motion be denied" when the parties have agreed to a valid forum-selection clause.  Under a traditional §1404(a) analysis, courts would weigh both the public and private interests of the parties to decide whether a transfer would serve "the convenience of the parties and witnesses" and promote "the interest of justice."  But, the Court held, the traditional analysis changes where a contract contains a forum-selection clause, which "represents the parties agreement as to the most proper forum."  Specifically, the analysis changes in three ways.

First, the "plaintiff's choice of forum merits no weight."  As the party defying the forum-selection clause, the plaintiff bears the burden of demonstrating why the court should not transfer the case to the agreed-upon forum.  Second, because the parties contractually agree to a specific forum, they waive any argument that the selected forum is inconvenient for themselves or their witnesses.  Therefore, the traditional public-private interest balancing test rests only on a consideration of the public interest factors, which the Court held "rarely defeat a transfer motion."  Third, when a party files suit in a forum other than that specified by agreement, the court weighing a § 1404(a) motion will apply the choice-of-law rules of the forum selected in the forum-selection clause, and not the choice-of-law rules of the original venue of suit.

After undergoing its § 1404(a) analysis, the Court remanded to allow the lower courts to consider whether any public-interest factor supported the denial of Atlantic's motion to transfer.

The holding in Atlantic Marine will no doubt lend predictability to both businesses and litigants as they bargain for venue in contracts and seek to enforce forum-selection clauses.

Civil Procedure, U.S. Supreme Court, mlogan