The U.S. Supreme Court on Monday agreed to resolve whether federal courts must enforce agreements between businesses on where to battle out their disputes.
In Atlantic Marine Construction Company v. J-Crew Management, the justices next term will review two different and conflicting approaches taken by the federal circuit courts in their enforcement of forum-selection clauses in business contracts.
The U.S. Chamber of Commerce and the Texas Civil Justice League filed amicus briefs urging the court to take the case and to reverse a ruling by the U.S. Court of Appeals for the Fifth Circuit.
"By declining to enforce a forum-selection clause in an agreement that was negotiated in an arms-length transaction between experienced business entities, the decision below frustrates the legitimate contractual expectations of thousands of businesses with similar contract provisions," wrote Carter Phillips of Sidley Austin for the chamber.
The chamber’s amicus brief added that the lower court’s ruling would discourage businesses from expanding geographically for fear of losing control of their litigation costs and would "invite uncabined forum-shopping."
The high court case stems from a Texas suit filed by J-Crew, claiming that Atlantic Marine failed to pay it for work performed as a subcontractor on construction of a child development center at Fort Hood, Texas. Atlantic Marine is a Virginia Beach, Virginia, corporation. The subcontract contains a mandatory forum selection clause stating that disputes shall be litigated in the Norfolk, Virginia circuit court or the U.S. District Court for the Eastern District of Virginia, Norfolk Division.
Despite the mandatory clause, the Fifth Circuit, relying on the justices’ 1988 decision in Stewart Organization Inc. v. Ricoh Corp., held that federal law, specifically 28 U.S.C. §1404(a), not state law, governs a motion to transfer to another federal court when there is a forum-selection clause. The court reasoned that "private parties should not have the power to transcend federal venue statutes that have been duly enacted by Congress and render venue improper in a district where it otherwise would be proper under congressional legislation." The Third, Sixth and Seventh circuits agree with the Fifth Circuit’s approach.
However, Atlantic Marine argues that the majority of federal circuit courts have ruled that a valid forum-selection clause makes venue improper in a forum other than the one designated by contract. And those clauses, it says, are routinely enforced through motions to transfer under Federal Rules of Civil Procedure Rule 12(b)(3) and 28 U.S.C. §1406.
Atlantic Marine, represented by W. Scott Hastings of Dallas’ Locke Lord, relies on the justices’ 1972 decision in M/S Bremen v. Zapata Off-Shore Co. "That is, a forum-selection clause will be enforced unless the party seeking to avoid the clause shows that it is unreasonable and unjust, or the product of fraud or overreaching," argues Hastings.
J-Crew’s counsel, Chad Simon of Allensworth & Porter in Austin, Texas, counters, "The truth is that it is not certainty that Petitioner seeks, rather it is an iron-clad right to forum-shop, without any regard for collateral effects of this decision on the public or the courts. Congress’s decision to subject forum-selection clauses to the individualized, case-by- case review of §1404 does not eliminate certainty; it merely requires the parties to consider factors beyond their own indiscriminate desiresincluding institutional concernsin deciding where the agreed-upon forum will be located."
Marcia Coyle is the chief Washington correspondent for The National Law Journal, a Legal affiliate based in New York.
