3 December 2013
The Supreme Court ruled on Tuesday that when it comes to picking the forum where a business dispute should be resolved, a contract is a contract.
By a unanimous vote, the court gave new strength to the forum-selection clauses that are included in many business contracts to determine in advance where disputes, if there are any, would be litigated.
“In all but the most unusual cases,” Justice Samuel Alito Jr. wrote for the court, “the interest of justice is served by holding parties to their bargain.” Alito also said, “When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties’ settled expectations.”
The ruling, experts say, will bring some stability and certainty to business litigation on an issue of basic importance. “The decision should cut down on ‘forum fights’ by establishing clear rules that enforce contractual obligations,” Mayer Brown partner Michele Odorizzi said. “Before this decision, forum selection clauses were not always enforced in federal court. The procedure for enforcing such a clause if the plaintiff chose to file suit in a forum other than the agreed forum was unclear.”
The U.S. Chamber of Commerce, in a brief filed in the case by Sidley Austin’s Carter Phillips, had said, “forum selection clauses are often an essential part of the parties’ bargain.” Allowing easy abrogation of the clauses, Phillips wrote, would “invite uncabined forum-shopping.”
The ruling came in the case Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, a dispute between Atlantic Marine, a Virginia-based federal contractor, and J-Crew Management, a Texas subcontractor hired to build a day care center at Ft. Hood in Texas.
A clause in their contract specified that any disputes that might arise would be litigated in Virginia. But J-Crew filed in the Western District of Texas anyway in a $160,000 squabble over payments.
Atlantic challenged the forum change as a violation of the federal rules of civil procedure and sought transfer back to Virginia or dismissal of the case. The district court ruled against Atlantic, finding it had not carried its burden of showing why the case should be moved back. The U.S. Court of Appeals for the Fifth Circuit agreed.
The high court ruling rejected the Fifth Circuit decision and found that a transfer back to federal court in Virginia was proper under the forum non conveniens doctrine and 28 USC 1404, except under “extraordinary circumstances.”
Significantly, the court also ruled that when the transfer is made back to the agreed-upon court, the prevailing law in that court should be applied—not the law used in the court where the case had been transferred. That feature of the ruling may also discourage plaintiffs from forum-shopping and ignoring their contracts.
“The court put a very strong thumb on the scale in favor enforcing forum selection clauses,” said Stephen Sachs, professor at Duke University School of Law. Sachs filed a brief in the case suggesting a “third way” to deal with forum transfers, allowing transferred cases to be dismissed. In an unusual order, the Supreme Court on Oct. 1 directed both sides in the dispute to read and be able to address Sachs’ proposed solution.
In the ruling Tuesday, the court noted Sachs brief again, but did not rule his approach in or out. “I am glad the court left the matter open,” said Sachs after reading the decision. “And of course I am gratified to be mentioned in the U.S. reports, and not as a criminal defendant.”
Also on Tuesday, the Supreme Court struck down another Fifth Circuit ruling in United States v. Woods, a unanimous ruling written by Justice Antonin Scalia. The court sided with the government in a dispute over an Internal Revenue Service penalty levied in a tax shelter case. Both the Atlantic Management and Woods cases were argued Oct. 9.
Reprinted with permission from the December 3, 2013 edition of The National Law Journal © 2013 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.