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US high court ponders if forum selection clauses trump federal rules

Forum selection clauses are commonly used to control where disputes can be adjudicated, particularly those arising from business and consumer contracts. But when a party files suit in a court other than the one specified in such an agreement, how can the aggrieved party enforce the contract terms, given that federal law controls the issue of venue?

The justices of the U.S. Supreme Court took up that thorny procedural question last week during arguments in the case of Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas, out of the 5th U.S. Circuit Court of Appeals.

The issue has created a three-way fissure among the circuits.

The parties in the case — Virginia Beach, Va.-based general contractor AMC and Texas-based subcontractor J-Crew Management Inc. — urged the court to adopt two different interpretations. But some justices seemed inclined to consider the third approach, used by the 1st Circuit and advocated in an amicus brief by a professor at Duke University School of Law in Durham, N.C.

Regardless of the outcome, Chief Justice John G. Roberts Jr. said that, for the business community, the stakes are high.

“The enforceability of these clauses is critically important to a lot of modern commerce,” Roberts said. “Businesses [may say]: ‘I don’t want to do business all across the country if I’m going to get dragged into different courts who knows where, where the juries are different.’”

Texas-sized venue tussle

The case began with a $160,000 construction agreement between AMC and J-Crew, which turned into a dispute when AMC refused to pay J-Crew for its services.

Though the construction project took place in Killeen, Texas, the parties’ contract specified that disputes would be litigated in state or federal court in Norfolk, Va.

But J-Crew filed suit in a Texas federal court instead. AMC filed objections including a motion under Federal Rule of Civil Procedure 12(b)(3) to dismiss for improper venue, a motion under 28 U.S.C. §1406 alleging a venue defect, and, in the alternative, a motion under §1404 to transfer the case to a Virginia court for “the convenience of the parties and witnesses in the interest of justice.”

The District Court refused to find the venue improper under 12(b)(3) or §1406 because the construction work took place within the district. The court also denied the §1404 motion after conducting an analysis of factors, including the contract clause, and finding that AMC failed to meet its burden of proving that a transfer to a Virginia court would advance the interests of justice or of the parties and witnesses.

The 5th Circuit denied AMC’s motion for a writ of mandamus, and the Supreme Court later granted the company’s petition for certiorari.

The circuits are split on the issue of what mechanism to use in the event of a breach of a forum selection agreement. Most circuits, including the 2nd, 4th, 7th and 8th, hold that such a contract can render a non-contractual venue improper for purposes of 12(b)(3) and §1406.

The 3rd, 5th and 6th Circuits hold that federal law, not contractual agreements, governs venue, although a forum selection clause can be one of many factors under a §1404 balancing test.

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    A third view, adopted by the 1st Circuit, holds that a forum selection pact can be an affirmative defense asserted by the party seeking to enforce the agreement when suit is filed in a court other than the one agreed on in the contract.

    Third option?

    W. Scott Hastings, a partner in the Dallas office of Locke Lord, argued on behalf of AMC that the law has long allowed parties to agree where to litigate disputes.

    “Venue, even before the current statutes were written, was recognized as being a privilege for the litigants,” Hastings said.

    But Justice Ruth Bader Ginsburg said that while the law allows parties to waive their objection to having disputes heard in otherwise improper venues, using a contract to declare a normally proper venue unsuitable could be a different matter.

    “My problem with your interpretation is you are allowing a private agreement to make a venue prescription that Congress enacted improper,” Ginsburg said. “Congress said it was proper.”

    Justice Antonin Scalia asked what the result would be if the court adopted the position advanced in an amicus brief by Duke professor Stephen E. Sachs, that while a contract cannot trump federal statutory venue rules, it can serve as a waiver of “the plaintiff’s right to sue in an excluded forum, offering the defendant an affirmative defense to liability in that forum and the right to have the suit dismissed.”

    Hastings acknowledged that Sachs’ approach “would be very favorable to my client because this case would have to be dismissed.” He expressed “concerns about that rule,” but said it would be better than the lower court’s balancing test.

    J-Crew’s counsel, William R. Allensworth of the Austin, Texas, office of Allensworth & Porter, told the justices that his client filed suit in Texas because it is “where we performed our work, where the project’s located, where all the witnesses reside, and where virtually all of the evidence is located.”

    To force witnesses to travel to Virginia would be an impermissible burden, Allensworth argued.

    But Justice Elena Kagan said that J-Crew willingly agreed to the forum selection pact.

    “This was a negotiated contract,” Kagan said. “You got something for the fact that you accepted inconvenience when you brought a suit.”

    Allensworth agreed that the contract was valid, but argued that under the law — as the lower court determined — the contract is merely one of several factors to consider in a §1404 analysis.

    “The only thing going in favor of this case going to Virginia is that forum selection clause,” Allensworth said.

    “Well, that’s kind of a big thing, isn’t it?” asked Roberts, drawing laughs from the audience.

    Justice Sonia Sotomayor wondered if all the procedural litigation over a $160,000 contract was worth it to the parties.

    “The only people collecting that $160,000 are going to be the lawyers,” Sotomayor said.

    “I wish,” Allensworth replied.

    A decision is expected later this term.

    — Follow Kimberly on Twitter

     


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