Forum Selection Clause

 

A contractual agreement that designates the court and location where the parties would like to have their legal dispute decided is commonly known as a "forum selection clause."

A forum selection clause seeks to provide a court with "personal jurisdiction" and to establish  "venue."  Personal jurisdiction is the court's power to exercise authority over a party. Venue is the physical location where a court exercises its power. Thus, a forum selection clause seeks to provide a court located in a specific location with the power to resolve a dispute. 

Courts have historically declined to enforce forum selection clauses, . In M/S Bremen v. Zapata Off-Shore Co.,the Court stated that they were often perceived as being contrary to public policy or to prevent an otherwise proper court from hearing a dispute. However, the court went against precedent, ultimately ruling that "in the light of present-day commercial realities ... we conclude that [a] forum clause should control absent a strong showing that it should be set aside."

In Stewart Organization, Inc. v. Ricoh Corp, the plaintiff filed a lawsuit at a federal court in violation of the parties' forum selection clause. The defendant, relying upon §1404(a), requested the trial court to transfer the case to the federal court described in the forum selection clause. In addressing the relationship between §1404(a) (which empowers a plaintiff to change forums, typically out of counterclaim concerns) and a forum selection clause (which prevents a plaintiff from transferring forums), the Court  stated that a forum selection clause is not controlling but is a "significant factor" for a court to consider when deciding whether it will transfer a case under §1404(a). The Court stated that a forum selection clause "should receive neither dispositive consideration ... nor no consideration ... but rather the consideration ... provided in §1404(a)."

In Atlantic Marine Const. Co., Inc. v. U.S. Dist. Ct. for the Western District of Texas, the Court further refined the relationship between a forum selection clause and §1404(a). The Court held that a forum selection clause shall be "given controlling weight in all but the most exceptional cases," consequently altering the appropriate §1404(a) analysis. The court made three findings: 

  1. The plaintiff's choice of forum has no weight and the plaintiff bears the burden of demonstrating why the case should not be transferred to the court described in the parties' forum selection clause.
  2. The parties' private interest factors weigh entirely in favor of the court described in the forum selection clause.
  3. A court may continue to consider public interest factors, however, the Court stated that they will "rarely" prevent a case from being transferred.

Other than the existence of compelling public interest factors, Atlantic Marine does not state whether other factual circumstances may constitute an "exceptional case." However, the Bremen court held that the presence of fraud and overreaching in negotiating a contract invalidates the forum selection clause itself. As such, their presence should constitute an exceptional case under Atlantic Marine. Moreover, Bremen arguably supports the general proposition that any legal theory that allows a party to invalidate the forum selection clause itself, for example mutual material mistake, constitutes an exceptional case under Atlantic Marine.

An "adhesion contract" (aka "standard form contract") may also provide an opportunity for a litigant to demonstrate an exceptional case.  In Carnival Cruise Lines Inc. v. Shute, the Court stated that a forum selection clause contained in a form contract is generally enforceable. Therefore, the mere fact that a form contract is not the product of negotiation and bargaining likely does not constitute an exceptional case under Atlantic Marine.

However, Carnival Cruise stated that form contracts are "subject to judicial scrutiny for fundamental fairness." To make this determination, a court can consider whether the forum selection clause contains an inconvenient venue. An inconvenient venue is typically one which has no real connection to the parties' contract, and/or is designed to discourage the party with no bargaining power from filing a lawsuit. A negotiated contract generally eliminates this concern because there is actual bargaining between the parties, as well as mutual agreement regarding venue.

The Second Circuit Court of Appeals has continued this deferential attitude toward forum selection clauses. In Future Industries of America v. Advanced UV Light (2011), the court upheld the contract's forum selection clause and its choice-of-law clause (both of which favored the defendant) (an example of a choice-of-law clause can be seen here), even though the defendant breached the contract. 

Courts, however, will exercise selectivity in choosing whether to enforce a forum selection clause. The same court that decided Future Industries invalidated a forum selection clause due to the clause's broad language. In Global Seafood Inc. v. Bantry Bay (2011), the Second Circuit found that the phrase " 'is governed by Irish Law and the Irish Courts' " does not "[impart] a clear and unambiguous intent by the parties to confer exclusive jurisdiction on Irish Courts or to select Ireland as the obligatory venue." The court found that while the term "govern" grants Irish courts jurisdiction, it does not grant the courts exclusive jurisdiction. Therefore, the forum selection clause was not valid. 

The Second Circuit in Phillips v. Audio Active Ltd. (2007) also created a four-part balancing test for determining the validity of a forum selection clause:

  1. Whether the clause was reasonably communicated to the party resisting enforcement.
  2. Whether the clause is mandatory or permissive, so that the court may determine whether the parties are required to bring any dispute to the designated forum or simply permitted to do so.
  3. Whether the claims and parties involved in the suit are subject to the forum selection clause. If the forum selection clause was communicated to the resisting party, has mandatory force, and covers the claims and parties involved in the dispute, it is presumptively enforceable.
  4. Whether the resisting party has rebutted the presumption of enforceability by making a sufficiently strong showing that “enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.”

Forum selection clauses have evolved from being nearly inoperative to controlling unless exceptional circumstances exist. Exceptional circumstances appear to exist when there are compelling public interest factors under §1404(a), or when there is a basis to invalidate the forum selection clause itself.  In certain circumstances, a forum selection clause contained in a form contract may constitute an exceptional case. However, the breadth of Atlantic Marine's exceptional case limitation is unclear and will likely cause more litigation in the future until the Supreme Court provides a more exact definition.

Regarding patent litigation, the Supreme Court in TC Heartland v. Kraft (2017) that a "patent owner [is no longer] able to sue an infringing defendant in a district court where the defendant is subject to personal jurisdiction. Instead, patent infringement lawsuits will only be able to be filed in districts within states where the infringing defendant is incorporated, or in districts where there has been an act of infringement and the defendant has a regular and established place of business." This effectively restricts forum selection clauses which arise in patent litigation cases.