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The Blurred Lines of the Forum Selection Clause


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Fisher

By Chase Fisher

Where’s the party at?
At issue was a forum selection clause requiring that all disputes “be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.”  The subcontractor, however, filed suit in the United States District Court for the Western District of Texas.

In the underlying case, the general contractor hired the subcontractor to work on a construction project building a child care facility at a military base in Fort Hood, Texas.  The subcontractor was a Texas corporation.  Upon completion of the project, the subcontractor was still owed $160,000, despite the subcontractor’s satisfactory completion of the work.  Thus, to get the funds owed, the subcontractor filed suit in the Western District of Texas on the basis of diversity jurisdiction (which requires that the dispute exceed $75,000 and involve parties of different states).  The contractor then moved to dismiss the case or, in the alternative, transfer the case to federal court in Virginia, citing the forum-selection clause in the parties’ contract.

It’s a little complicated
Ultimately, the Supreme Court approved the contractor’s alternative argument requesting that the case be transferred to the federal court in Virginia.  To arrive at that decision, the court went through significant and extensive legal analysis regarding motions to dismiss versus motions to transfer; however, for purposes of this article, the case has two significant results.  

First, the case resolved a split between circuit courts regarding the proper legal mechanism to handle forum selection clauses.  Most circuits allowed cases filed in a different jurisdiction from the forum selection to be dismissed for improper venue.  This posed a significant threat to subcontractors, as dismissal could have prevented some cases from being refiled, such as when the applicable statute of limitations on the matter has expired.  Other circuits, however, including the Sixth Circuit, held that cases filed in a forum different from the one in the contract should be analyzed under a motion to transfer standard, which would simply cause the case to be moved to a different federal court.  Here, the Supreme Court leaned in favor of the minority position advocating transfer.

Second, although the Supreme Court held that transfer was the appropriate method, it set forth a stricter transfer standard for the party who files suit in a different forum to be able to keep the case in that forum.  Specifically, the court altered the usual transfer analysis in three ways.  First, "the plaintiff's choice of forum merits no weight," and the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted.  Second, a court "should not consider arguments about the parties' private interests"; only public interests (which rarely defeat a transfer motion) may be considered.  Third, "when a party bound by a forum-selection clause flouts its contractual obligation and files suit in a different forum, a §1404(a) transfer of venue will not carry with it the original venue's choice-of-law rules."  As a result of this new analysis, the Supreme Court remanded the case to the district court to apply the analysis to the contractor’s motion to transfer. 

Takeaway
Generally, the forum selection clause in a contract, as with any other contract clause, is presumed to have been agreed upon by the parties.  Thus, when one party attempts to ignore the provision, they are held to a higher standard of proof as to why the court should also ignore the provision.  The practical impact of this decision is that the presence of a forum selection clause will require district courts to modify the way they evaluate motions to transfer venue.  Instead of looking to the parties’ private interests (such as the subcontractor’s argument that it was based in Texas, the contract was in Texas and all the witnesses were in Texas), the court will instead look to only public interests, as well as the other factors above.  This means that forum selection clauses will generally control where suit can be filed, except in unusual cases.

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