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Tuesday, November 26, 2013

Do you have an Enforceable Forum Selection Clause?

For companies that do business in multiple states, a forum selection clause can minimize the risks and expenses associated with being hailed into a distant and unfamiliar court. A forum selection clause in a contract allows the parties to agree that any litigation resulting from that contract will be initiated in a particular court in a certain state. Generally speaking, state and federal courts will consider a forum selection clause to be reasonable as long as any party to the contract has maintained offices or conducted activities in the chosen state, or the contract was executed or performed in that state. But what happens when a party to the contract then files suit in a court other than the one agreed to in a forum selection clause? This issue has created a circuit split among the United States courts of appeals as to the proper standard for enforcing such clauses.

The majority of federal courts, including the Fourth Circuit, which has appellate jurisdiction over the district courts in Virginia and Maryland, strictly enforce forum selection clauses without questioning convenience of the parties and witnesses. When a plaintiff files suit in a forum other than the one chosen by the forum selection clause, the forum is automatically improper and dismissal is appropriate under FRCP 12(b)(3). On the other hand, a minority of federal courts use the multi-factor balancing test under 28 U.S.C. § 1404(a), the federal venue transfer standard, that involves several private and public interest convenience factors, making the enforcement of a forum selection clause discretionary to the district court judge, and as a consequence, unpredictable. Under this approach, the existence of a forum selection clause is only one factor to consider in whether to transfer the case to the contractually selected forum, provided that the current venue is otherwise proper.

The U.S. Supreme Court granted review of In re Atlantic Marine Construction Co.701 F.3d 736 (5th Cir. 2012), to resolve this circuit split. The Fifth Circuit Court of Appeals’ opinion involved a Texas construction project with a subcontract that required litigation to be brought in Virginia. Despite the fact that the subcontract’s forum selection clause was clear and otherwise enforceable, the Fifth Circuit affirmed the district court judge’s decision not to enforce it on convenience grounds, joining the minority of federal courts on how such clauses should be enforced.

The Supreme Court’s decision is expected to be issued sometime in 2014, and will hopefully provide guidance on how heavily businesses can rely on such clauses.  If the Court adopts the majority approach, businesses can be more confident that the forum selection clauses they insert in their contracts will be enforced and will help provide certainty to companies as they move their business forward.