Forcing the Forum: The Power of Forum Selection Clauses

Forcing the Forum: The Power of Forum Selection Clauses

Forum selection clausesi.e., contractual provisions that designate a particular venue for litigation related to the contract—are ubiquitous and potentially powerful tools found in contracts ranging from divorce settlements to complex derivative instruments. And although forum selection clauses have always been a useful tool for both counsel and management looking to control and contain the cost of potential litigation, the U.S. Supreme Court’s recent decision in Atlantic Marine Construction Company v. U.S. District Court for the Western District of Texas clarified—and, indeed, amplified—the significance such clauses can have, if executed correctly.

When drafted and enforced as discussed below, forum selection clauses provide not only control over the specific court in which litigation related to the contract must be brought, but also a significant likelihood of enforcement (often through dismissal) if a litigation adversary brings an action elsewhere. If not drafted properly, however, a contracting party runs the substantial risk that a court will find that the forum selection clause does not cover certain noncontractual claims, such as fraud, or that the forum to which the clause refers is merely a permissible, as opposed to mandatory, venue.

Mandatory and Applicable

Although the Supreme Court in Atlantic Marine expounded on the weight that courts must give forum selection clauses, it did so under the express assumption that the clause was applicable to the claims at issue and that the clause was mandatory as opposed to permissible. The first step in drafting and enforcing a forum selection clause is, therefore, ensuring that it is both mandatory and applicable.

Contracting parties frequently run into problems when a forum selection clause is framed in terms of a particular court having jurisdiction over the contracting parties, as different courts can exercise concurrent personal jurisdiction over a litigant. Therefore, clauses framed in terms of jurisdiction are often interpreted as permitting (not mandating) that an action be brought in a particular forum. For instance, permissive forum selection clauses often use language indicating the contracting parties “submit to the jurisdiction” of a particular court, or that disputes relating to the contract “shall come within the jurisdiction” of a particular court. If a contract includes similar language, a court would be free to reject the chosen forum.

A mandatory clause, however, requires that an action be brought in a particular court. When framed in terms of jurisdiction, a mandatory forum selection clause must indicate that parties “submit to the exclusive jurisdiction” of a particular court, or that disputes relating to the contract “shall come within the exclusive jurisdiction” of a particular court. However, an even clearer way to establish that a case must be brought in a particular forum is to separate jurisdiction and venue altogether. For instance, a contract can state that the parties “submit to the exclusive jurisdiction” of a particular court and that any dispute related to the contract “shall be brought” in that court. Framing the forum selection clause in this manner will almost certainly result in a mandatory application.

An equally important question courts face when interpreting forum selection clauses is the substantive scope of the clause—in other words, what claims are covered by the clause. In most cases, it is clear that the clause applies to at least breach of contract claims. Ambiguities arise, however, when courts determine whether the clause applies to tort and other extra-contractual claims. For instance, forum selection clauses are frequently drafted to apply to claims that “arise out of” or that are brought “in connection with” the contract. Many courts have interpreted each of these phrases as encompassing something less than all claims relating to the contract. To ensure that all causes of action that a contracting party might bring will be encompassed by the applicable clause, careful drafters should use the most expansive language possible, such as stating that all claims “arising out of, in connection with, or in any way relating to” the contract at issue must be brought in the selected venue.

Enforcing the Clause

In Atlantic Marine, the court reviewed a decision of the U.S. Court of Appeals for the Fifth Circuit. The Fifth Circuit upheld the district court’s denial of the defendant’s motion to dismiss or transfer, which was based on a forum selection clause the Supreme Court presumed was both mandatory and applicable. The district court, following a traditional 28 U.S.C. § 1404(a) analysis—which requires consideration of plaintiff’s choice of forum, convenience of the parties and witnesses, and public interest (among other factors)—found that a valid forum selection clause was merely “one such factor” to be considered in conjunction with other factors. Finding that the significant inconvenience to potential witnesses outweighed any countervailing factors, the district court denied the defendant’s motion. The defendant filed a writ of mandamus to compel the district court to dismiss the case, and the Fifth Circuit affirmed the district court’s decision.

In reversing, the Supreme Court began by clarifying that a motion to transfer venue under § 1404(a) (as opposed to dismissal for improper venue under FRCP 12(b)(3)) is the exclusive method by which a party may enforce a forum selection clause in federal court if the clause calls for adjudication in another federal forum. If the clause points to a nonfederal forum, the court stated that “the appropriate way to enforce [such a clause] is through [a motion to dismiss pursuant to the] doctrine of forum non conveniens.” The court further stated that “because both § 1404(a) and the forum non conveniens doctrine from which it derives entail the same balancing-of-interests standard, courts should evaluate [motions under § 1404(a) in the same manner as motions pursuant to forum non conveniens].”

The court then turned to the significant effect that a binding forum selection clause has on a § 1404(a) or forum non conveniens analysis. First, the court held that the “plaintiff’s choice of forum[, which usually receives substantial consideration,] merits no weight. Rather, as the party defying the forum selection clause, the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted.” Second, the court held that lower courts should “not consider arguments about the parties’ private interests,” including convenience of the parties or potential witnesses. The court stated that “whatever inconvenience the parties would suffer by being forced to litigate in the contractual[ly agreed-upon] forum . . . was clearly foreseeable at the time of contracting.” The result of these significant modifications to the traditional analysis is that, when deciding a motion to transfer or dismiss, “a district court may consider arguments about public interest factors only.” Moreover, “because [public interest] factors will rarely defeat a transfer motion,” a forum selection clause should control “in all but the most unusual cases.”

Conclusion

The Supreme Court’s decision in Atlantic Marine provides astute contracting parties substantial control over where disputes relating to a contract will be litigated. If a forum selection clause is drafted with mandatory language and in a way that covers all causes of action related to the contract, a party need only make a relatively simple motion to transfer (if the clause points to a federal forum) or dismiss (if the clause points to a state forum). Because either of these options would provide the moving party with a significant tactical advantage in the overall litigation, contracting parties should pay careful attention to the above if they want to force the forum.

Ryan M. Wilson practices in Lowenstein Sandler’s litigation department and is a member of the white-collar criminal defense and capital markets litigation practices. He represents clients in a variety of complex civil and criminal litigation matters, with a particular focus on cases involving structured financial products, derivatives and other securities.

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