Hepler Broom, LLC

SCOTUS Charts Path for Forum Selection in Federal Courts

December 10, 2013

In many commercial contexts an agreement includes a provision that selects a forum for future dispute resolution.  Frequently, when conflict arises, a party may try to avoid the selected forum and file the first case on their home turf.  The other party to the contract has to respond, but how?

Atlantic Marine Construction Co., a Virginia corporation, faced this issue in a construction contract dispute on a Texas project.  Despite a standard forum-selection clause requiring litigation of disputes in state or federal court in Norfolk, Virginia, a subcontractor filed a preemptive suit against Atlantic in federal court in Texas.  Of course, the subcontractor, J-Crew Management, Inc., is a Texas corporation.

Understandably, Atlantic Marine moved to dismiss the Texas case, arguing that the forum-selection clause made venue “wrong” under 28 U.S.C. §1406(a) and “improper” under Fed.R.Civ.P. 12(b)(3), and, alternatively, moved to transfer to federal court in Virginia under 28 U.S.C. § 1404(a).  To its chagrin, the district court denied both motions.  For transfer, the district court required Atlantic to carry the burden and engaged in the usual transfer analysis, including the convenience of witnesses, access to evidence, and other public and private interest factors.  The forum-selection agreement was only one factor, and the district court found Atlantic had not carried its burden. .

Undeterred, Atlantic sought mandamus relief from the Fifth Circuit Court of Appeals.  The Fifth Circuit affirmed the district court, finding that §1404(a) is the exclusive mechanism for enforcing forum-selection clauses directed to another federal court, Rule 12(b)(3) cannot be used to direct the case to a selected non-federal forum, and there was no abuse of discretion in denying transfer despite the validity of the forum-selection agreement.  In re Atlantic Marine Constr. Co., 701 F.3d 736, 742 (5th Cir. 2012)

The Supreme Court took the case. Justice Alito, writing for the Court, agreed that Rule 12(b)(3) only allows dismissal of a case when venue is “improper,” which does not turn on any agreement of the parties but rather on whether venue in the court in which the case is filed meets the federal venue laws.  If venue is proper in a given district under 28 U.S.C. § 1391(b), so be it.  If it is not, then the case may be dismissed or transferred under §1406(a).

The Court also agreed that forum-selection provisions may be enforced under the general transfer statute, §1404(a), for cases in federal courts.  If, however, the choice of forum is a state court, parties may seek enforcement under the forum non conveniens doctrine.  The Justices left open a question not raised below—whether Rule 12(b)(6) may serve as a procedural basis to dismiss a case filed in derogation of the forum agreement.

But the Supreme Court did not leave Atlantic adrift in Texas.  The Court ruled that the district court had misapplied the proper §1404(a) analysis.  In doing so, it announced a new rule that in the context of a forum-selection agreement, the district court should transfer the case to the agreed federal forum unless extraordinary circumstances unrelated to convenience disfavor transfer.

The game changes in the presence of a forum-selection provision, which serves as the parties “agreement as to the most proper forum.”  Absent extraordinary circumstances, the agreement should be given controlling weight over all other factors.

Accordingly, the Court gave specific direction to the lower courts to “adjust their usual §1404(a) analysis in three ways”:

  • The plaintiff defying the agreement has the burden to prove exceptional circumstances and their choice of forum bears no weight;
  • Public interests may be considered; the private interests of the parties are irrelevant except as expressed in the agreement; and
  • When a plaintiff violates the agreement, the original forum’s choice-of-law rules do not apply.

These standards virtually pre-ordain transfer to honor a valid forum selection agreement.

Notably, the Court found the district court abused its discretion by improperly placing the burden on Atlantic to justify transfer; rather, J-Crew should have been required to show the public interest factors overwhelmingly disfavored transfer.  The district court’s ruling that Texas judges were better suited to apply Texas contract law erroneously assumed that Texas choice-of-law principles applied and would have required the Virginia district court use Texas law.

This case provides important direction to parties seeking to avoid being dragged into litigation in an adversary’s back yard in derogation of a valid forum agreement.  Atlantic Marine Constr. Co. v. United States Dist. Court for Western Dist. Of Tex.,  571 U.S. ___ (2013) (Dec. 13, 2013).