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High court clarifies where contract disputes can be filed

WASHINGTON — A U.S. Supreme Court ruling this week addressed the proper mechanism for enforcing contract clauses that specify where lawsuits may be filed in the event of a dispute. One likely result: These clauses will be a lot easier to enforce.

The decision in Atlantic Marine Constr. Co. v. United States Dist. Court for Western Dist. of Tex. clears up confusion that had divided some of the judicial circuits.

The ruling not only provides clarity, it also underscores the enforceability of such clauses, which are known as contractual forum selection clauses.

“This will have a pretty large impact on how forum selection clauses will be enforced in federal court,” said Jason A. Lien, a partner in the Minneapolis office of Maslon Edelman Borman & Brand LLP.

The decision “clarifies the procedure that should be followed and, more importantly, requires forum selection clauses to be enforced except in the unusual situation where the plaintiff can show that there is a public policy reason for allowing it to violate the clause and remain in the forum where the lawsuit was brought,” said Michele L. Odorizzi, a partner in the Chicago office of Mayer Brown LLP.

The case stems from a $160,000 construction agreement between general contractor Atlantic Marine Construction Co. and its subcontractor, J-Crew Management Inc. After AMC refused to pay J-Crew for its services, J-Crew filed suit in a federal court in Texas.

Although the construction took place in Texas, the contract contained a provision specifying that any disputes would be litigated in state or federal court in Norfolk, Va.

AMC filed several motions based on that forum selection clause: 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 an alternative motion under §1404 seeking 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. After conducting an analysis under §1404 the court also denied that motion, 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 U.S. Circuit Court of Appeals turned AMC down, but the Supreme Court agreed to hear the case to resolve a split in the circuits on how parties can enforce forum selection clauses.

In a majority of federal appellate courts, including the 2nd, 4th, 7th and 8th Circuits, such contracts were nearly universally enforceable. Those circuits held that such pacts could render a non-contractual venue improper for purposes of Rule 12(b)(3) and §1406.

But the 3rd, 5th and 6th Circuits held that federal law, not contractual agreements, governs venue, although a forum selection clause could be one of many factors judges might consider under a discretionary §1404 balancing test.

The Supreme Court’s unanimous ruling essentially uses the approach of the minority circuits to effect the majority result. The justices held that §1404 is the proper mechanism to enforce such clauses, but narrowed the analysis to heavily favor the enforcement of these pacts, except in very limited circumstances.

‘Extraordinary circumstances’

The court’s opinion, authored by Justice Samuel A. Alito Jr., found that a forum selection clause cannot make an otherwise permissible venue legally “improper” under §1406.

However, “[a]lthough a forum-selection clause does not render venue in a court ‘wrong’ or ‘improper’ within the meaning of §1406(a) or Rule 12(b)(3), the clause may be enforced through a motion to transfer under §1404(a),” Alito wrote.

Although the 5th Circuit correctly analyzed the claim pursuant to §1404, Alito said, it used the wrong analysis.

“When the parties have agreed to a valid forum-selection clause, a district court should ordinarily transfer the case to the forum specified in that clause,” he wrote. “Only under extraordinary circumstances unrelated to the convenience of the parties should a §1404(a) motion be denied. And no such exceptional factors appear to be present in this case.”

The court held that the §1404 balancing test must be adjusted in three ways: (1) the plaintiff’s choice of forum should receive no weight in the analysis; (2) a court may only consider public interest reasons in favor of an alternative venue, not the parties’ private interests, and (3) the party who filed in a venue other than one specified in the agreement cannot benefit from choice-of-law rules from the original venue.

“They really did split the difference” between the majority and minority approach in the circuit courts, Lien said. “They modified the §1404 analysis to make it a new test, but that test is consistent with the majority view.”

The court declined to adopt the approach used by the 1st Circuit and advocated in an amicus brief by Duke University School of Law professor Stephen E. Sachs that would have allowed the existence of a forum selection pact to be asserted as an affirmative defense by the party seeking to enforce it.

The ruling marks the first time the court has taken up the issue of forum selection clause enforceability in more than two decades, and gives much-needed clarity on the issue.

“Before this decision, forum selection clauses were not always enforced in federal court,” Odorizzi asserted.

Lien said that the ruling seems to be in line with other decisions by the court supporting enforcement of other types of contract clauses, such as choice-of-law and arbitration agreements.

“The court seems to take the approach that if the parties negotiate it, it should be enforced,” Lien said. “It’s consistent with the trend of … enforcing other types of clauses related to the procedure of litigation, like arbitration clauses.”