How a Recent US Supreme Court Ruling Will Affect Forum Selection Clauses in Commercial Contracts | Practical Law

How a Recent US Supreme Court Ruling Will Affect Forum Selection Clauses in Commercial Contracts | Practical Law

Parties who rely on forum selection clauses to control litigation in contracts that span multiple jurisdictional venues should be aware of a recent ruling from the US Supreme Court that strongly favors enforcing valid forum selection clauses. The ruling requires defendants to enforce forum selection clauses through motions to transfer under 28 U.S.C. § 1404(a) and overturns a majority rule that allowed defendants to enforce the clauses through motions to dismiss under Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. § 1406(a). However, the holding also places a heavy burden on plaintiffs who breach valid forum selection clauses by suing in forums other than those designated by their agreements.

How a Recent US Supreme Court Ruling Will Affect Forum Selection Clauses in Commercial Contracts

by Practical Law Commercial
Published on 10 Dec 2013 • USA (National/Federal)
Parties who rely on forum selection clauses to control litigation in contracts that span multiple jurisdictional venues should be aware of a recent ruling from the US Supreme Court that strongly favors enforcing valid forum selection clauses. The ruling requires defendants to enforce forum selection clauses through motions to transfer under 28 U.S.C. § 1404(a) and overturns a majority rule that allowed defendants to enforce the clauses through motions to dismiss under Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. § 1406(a). However, the holding also places a heavy burden on plaintiffs who breach valid forum selection clauses by suing in forums other than those designated by their agreements.
A recent US Supreme Court opinion addressed the enforceability of contractual forum selection clauses, overturning a majority rule that had previously been followed in at least nine federal circuits. The decision in Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas has important implications for businesses that rely on forum selection clauses to provide a degree of control in commercial contracts that span multiple jurisdictions.
(, No. 12-929, slip op, 571 U.S. _ (U.S. Dec. 3, 2013).)
This Update provides an overview of:

Forum Selection Clauses

A forum selection clause, also known as a jurisdiction clause or a choice of forum clause, allows the contract parties to choose the state or federal courts, or both, that will have personal jurisdiction over the parties to adjudicate disputes under the contract. This is allowed even if the venue in the selected forum may not otherwise be available under the applicable venue statute, provided the selected courts have subject matter jurisdiction. Under the Bremen standard, federal courts generally view forum selection clauses as prima facie or presumptively valid unless unreasonable and unjust under the circumstances. (Bremen v. Zapata Off-Shore Co., 407 U.S. 1(1972).)
There are two broad categories of forum selection clauses:
  • Mandatory forum selection clauses, also known as exclusive clauses, which requires the parties to bring any dispute to the selected forum.
  • Permissive forum selection clauses, also known as non-exclusive clauses, which permit, but do not require, the parties to bring any dispute to the selected forum. The plaintiff has the right to choose another forum, if the other forum has appropriate jurisdiction.
For examples of forum selection clauses, see Standard Clauses:
Forum selection clauses often figure centrally in parties' negotiations and can affect monetary and other contractual terms. This is especially true when parties provide goods or services to customers in numerous venues throughout the country or internationally. These clauses work with governing law clauses, and other dispute resolution clauses, to provide some clarity on how an agreement will be interpreted, or how disputes stemming from it will be resolved.
For examples of forum selection clauses in commercial agreements, see Standard Documents, General Purchase Order Terms and Conditions (Pro-buyer): Section 29 and Manufacturing Supply Agreement (Pro-buyer): Section 17.18.

The Atlantic Marine Decision

In Atlantic Marine, Atlantic Marine Construction Co. (Atlantic) entered into a subcontract with J-Crew Management, Inc. (J-Crew) that included a forum selection clause stating that all disputes between the parties would be litigated in Virginia. However, when a dispute arose J-Crew filed suit in the Western District of Texas. Atlantic moved to dismiss, arguing that the venue was wrong under 28 U.S.C. § 1406(a) and improper under Federal Rule of Civil Procedure (FRCP) 12(b)(3). Atlantic alternatively moved to transfer the case to the Eastern District of Virginia under 28 U.S.C. § 1404(a). The US District Court for the Western District of Texas denied both motions. The US Court of Appeals for the Fifth Circuit denied Atlantic's petition for a writ of mandamus directing the District Court to dismiss or transfer the claim.
On appeal the US Supreme Court reversed and remanded the case, unanimously holding that:

Forum Selection Clauses May Not Be Enforced By Seeking Dismissal under Section 1406(a) or FRCP 12(b)(3)

Atlantic argued that a party may enforce a forum selection clause by seeking dismissal of a suit under Section 1406(a) and FRCP 12(b)(3). The Supreme Court rejected this argument, stating that Section 1406(a) and FRCP 12(b)(3) allow dismissal only when venue is wrong or improper. Wrong or improper venue depends exclusively on whether the court in which the suit is filed satisfies federal venue law. For venue to be proper, the suit must be brought in a district where any of the following is true:
  • One of the defendants is a resident, if all of the defendants reside in the same state. A substantial part of the events giving rise to the claim occurred there.
  • Any of the defendants are subject to the court's personal jurisdiction.
(28 U.S.C. § 1391.)
A contractual forum selection clause agreed to by the parties has no bearing on whether a venue is proper. This is true even if the forum selection clause points to a state or foreign court. If a claim satisfies the requirements of Section 1391, federal venue is proper and the claim cannot be dismissed under Section 1406(a) or FRCP 12(b)(3).

Forum Selection Clauses May Be Enforced Using a Motion to Transfer under Section 1404(a)

Unlike Section 1406(a) and FRCP 12(b)(3), Section 1404(a) does not condition transfer on the initial forum being wrong or improper. Section 1404(a) permits transfer of a claim to any district where either:
  • Venue is proper.
  • The parties have agreed by contract or stipulation to settle disputes.
Therefore, Section 1404(a) provides a mechanism for enforcement of forum selection clauses that point to a particular federal district.
The doctrine of forum non conveniens is the appropriate enforcement method for a forum selection clause that points to a state or foreign forum. The Supreme Court noted that Section 1404(a) is merely a codification of that doctrine. Although Section 1404(a) does not apply to cases that call for a non-federal forum, the doctrine of forum non conveniens still applies in federal courts. Therefore, courts should evaluate a forum selection clause pointing to a non-federal forum the same way they evaluate a forum selection clause pointing to a federal forum.

Courts Should Transfer Cases to the Forum Specified in a Forum Selection Clause

Ordinarily, courts reviewing a motion to transfer under Section 1404(a) consider both private and public interest factors before deciding whether, on balance, transferring the case would serve the convenience of the parties and promote the interest of justice. However, the Supreme Court reasoned that when parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties' expectations.
Therefore, the Supreme Court held that a valid forum selection clause requires courts to adjust the Section 1404(a) analysis in three ways:
  • The plaintiff, as the party breaching the forum selection clause, bears the burden of establishing why the court should not transfer the case to the forum the parties bargained for in the underlying contract.
  • Only public interest factors should be considered. The parties' private interests should not be considered because by entering into a forum selection clause the parties have waived the right to challenge the selected forum as inconvenient. Private interest factors include:
    • ease of access to sources of proof;
    • availability of compulsory process for the attendance of unwilling witnesses; and
    • any other practical problems that make trial of a case easy, expeditious and inexpensive.
  • The original venue's choice-of-law rules do not follow the case to the forum contractually selected by the parties. Allowing the plaintiff, who has breached the forum selection clause, to anchor its choice of law to the venue transfer would be inequitable and encourage gamesmanship.

Practical Implications

The decision in Atlantic Marine has several important consequences for businesses and counsel that enter into commercial agreements containing forum selection clauses. Prior to the Atlantic Marine decision the majority rule allowed defendants to enforce forum selection clauses by filing a motion to dismiss under Section 1406(a) or FRCP 12(b)(3). Atlantic Marine overturned the majority rule. Defendants must now enforce a forum selection clause by bringing a motion to transfer under Section 1404(a).
As a result, parties to commercial contracts should:

Consider Forum Selection Factors

Atlantic Marine makes it difficult for plaintiffs to engage in forum shopping when filing a claim under an agreement that contains a forum selection clause because the Supreme Court's holding:
  • Places the burden on the plaintiff in a Section 1404(a) motion to establish that the transfer to the forum the parties bargained for is unwarranted.
  • Prevents the plaintiff from arguing that the contractually selected forum is inconvenient.
  • Prohibits the choice-of-law rules from the original forum from attaching to the claim when it is transferred under a Section 1404(a) motion to enforce a forum selection clause.
Therefore, parties entering into forum selections clauses should carefully evaluate forum selection factors and negotiate a clause that serves their needs. Parties should consider whether, for example:
  • The forum is friendly or hostile to particular types of litigants or legal arguments in the type of disputes that are likely to arise under the agreement.
  • The selected jurisdiction's substantive law is well developed or predictable for the type of disputes likely to arise under the agreement.

Corporate Practitioners

The decision of the Supreme Court is also relevant for corporate practitioners, for whom the issue of forum selection clauses is an evolving topic. The Delaware Court of Chancery has recently upheld the validity of forum selection clauses in corporate by-laws, while also rejecting an attempt to enjoin a suit that was brought in the “wrong” jurisdiction (see Legal Updates, Delaware Court of Chancery Upholds Boards' Unilaterally Adopted Forum Selection By-laws and Delaware Court of Chancery Declines to Enjoin Claim Brought Outside Delaware Despite Forum Selection Clause. The Atlantic Marine decision implicitly endorses the views of the Delaware Court of Chancery by confirming the controlling weight of the parties’ contractual choice of forum and by requiring that the defendant move to have the case transferred to the appropriate venue.