The Inherent Dangers in Forum Selection Clauses

May 19, 2014
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Craig Wendland

Forum Selection Clauses

Virtually every contract placed in front of you is likely to have a set of “boilerplate” clauses.  Often behind an exhausting wall of deal terms and legalese, these provisions are innocuously labeled and easy to overlook by laymen and professionals alike.   

Don’t be fooled…

There are reasons why these “general provisions” are placed within virtually every agreement that you are likely to encounter.  Each governs critical aspects of your agreement.  If you don’t take the time to read the entirety of your agreement carefully, you may be unpleasantly surprised.

One seemingly innocuous section which individuals are ill-advised to ignore is the omnipresent forum selection clause.  A failure to examine this clause may quickly have you “hometowned”:  Litigating cross-country, under an unfavorable choice of law with an unfriendly trier-of-fact.

Background

Broadly defined, a forum selection clause is a term within a contract which allows the parties to agree that a specific forum dispute resolution process.  This can include setting a specific court, locale, jurisdiction, or even an alternative dispute resolution process.  You will find one in almost every contract.

Typically, a forum selection clause includes a choice of the forum state, including a reference to the forum court, and is usually grouped with a choice of law clause defining the governing body of law that the forum will use.

Pervasive and with harsh consequences, forum selection clauses have been subject to a good deal of scrutiny over the years.  On at multiple occasions, our Supreme Court has weighed in on forum selections, both to align disagreeing courts and provide general guidance on applicability and enforcement.

Atl. Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas

Most recently, on December 3, 2013, the Supreme Court ruled on forum selection clauses in Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568 (2013).  In Atlantic Marine, a subcontractor brought an action against a contractor in the Western District of Texas, alleging the contractor failed to pay for work at an army base.  The contractor moved to dismiss or transfer, pursuant to a forum-selection clause specifying the Eastern District of Virginia.  The district court denied the motion and the contractor petitioned for a writ, which the Court of Appeals denied.  The Supreme Court granted certiorari to review the action.

The Supreme Court held that absent “extraordinary” circumstances, district courts should transfer a matter to the forum identified in a valid forum selection clause. Id. at 574.

The Supreme Court’s opinion is particularly important as it displays strong support in favor of enforcing forum selection clauses, resolved a long-standing federal circuit split on the issue, and establishes that the party opposing the forum selected in the contract carries the burden in motions to enforce forum selection clauses.  Overall, this adds more certainty to party expectations in the interstate context.

California Law Also Favors Enforcement

California law also strongly favors contractual forum selection clauses, so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable.  Am. Online, Inc. v. Superior Court, 90 Cal. App. 4th 1, 11 (2001), citing Smith, Valentino & Smith, Inc. v. Superior Court, 17 Cal. 3d 491, 495-496 (1976).

Moreover, California’s policy favoring access for residents to its court system is not “thwarted” simply via forum selection clauses pulling parties out of state.  Cal-State Business Products & Services, Inc. v. Ricoh, 12 Cal. App. 4th 1666, 1678 (1993), modified.  Rather, residents may voluntarily surrender this right in the course of contract negotiations.  Id.

The Burden Of Proof And Enforceability Factors

Accordingly, California courts have held that the party opposing the enforcement of a forum selection clause, generally the plaintiff, bears the burden of proof.  Id. at 1680.  Under California law, a plaintiff seeking to defeat a forum-selection clause has a “heavy burden” in showing that enforcement would be unreasonable.  Omstead v. Dell, Inc., 473 F.Supp.2d 1018 (2007), reconsideration denied 533 F. Supp. 2d 1012, reversed on other grounds 594 F.3d 1081; see also, Miller-Leigh LLC v. Henson, 152 Cal. App. 4th (2007); Berg v. MTC Electronics Technologies, 61 Cal. App. 4th 349, 358 (1998) review denied, (On motion to stay or dismiss for forum non conveniens, where there is mandatory forum selection clause, test is “simply whether application of clause is unfair or unreasonable, and clause is usually given effect.”).

This can be a difficult task, as a plaintiff seeking to demonstrate that a clause is unreasonable must show that the forum selected is unsuitable, unavailable or otherwise unable to accomplish substantial justice.  America Online, Inc. v. Superior Court, 90 Cal.App.4th 1 (2001), as modified, review denied.  Of course, the forum selection clause must also have a “reasonable connection” to the parties or the dispute.  Id.

Such a showing might be made by serious public policy considerations against enforcement of a particular clause, a great disparity of bargaining power or if the forum would be seriously inconvenient to the trial.  Cal-State, 12 Cal. App. 4th at 1679.  Note, however, that neither private party inconvenience nor additional expense in litigating in the selected forum are part of the test of “unreasonability” of forum named in a contract forum selection provision for purposes of determining whether provision is enforceable.  Id. (citations omitted).

Enforcement

The Supreme Court has determined that the proper mechanism to enforce a forum selection clause when the transferee forum is in the federal court system is by filing a § 1404(a) motion to transfer.  Atlantic Marine, 134 S. Ct. at 581.  The federal analysis is also strongly slanted towards enforcement, with the burden falling squarely on the party opposing enforcement.  The party opposing the transfer must show overwhelming public interest factors which disfavor transfer, while the court is to assume that all private party factors favor the selected forum.  Id. at 583.  To prevent forum shopping and “gamesmanship,” if the forum selection clause is found to be valid and the case is transferred, the original court’s law does not follow to the new forum court.  Id.

In California, the proper procedure for enforcing forum selection clause is generally a motion to stay or dismiss for forum non conveniens, although transfer motions in-state may be appropriate in some circumstances.  Berg, 61 Cal. App. 4th at 358.

Mandatory vs. Permissive Forum Selection Clauses

In California, once a forum non conveniens motion has been filed, a threshold issue is whether the forum selection clause is mandatory or permissive.  Animal Film, LLC v. D.E.J. Productions, Inc., 193 Cal. App. 4th 466 (2011).  Clauses which grant jurisdiction to a particular forum without expressly making that forum the mandatory or sole forum for resolution of disputes are considered “permissive.”  Berg, 61 Cal. App. 4th at 359.  Reciprocally, clauses which do mandate the forum are “mandatory.”  Id.

Permissive clauses generally result in a traditional forum non conveniens analysis by the court, in which the clause is a consideration but also considering private party convenience and expense.  Id. at 471. However, factors which apply generally to forum non conveniens motions do not control in case involving mandatory forum selection clause.  Berg, 61 Cal. App. 4th at 358.

Rather, a mandatory contractual forum selection clause will ordinarily be given effect without any analysis of convenience; the only question is whether enforcement of the clause would be unreasonable.  Intershop Communications v. Superior Court, 104 Cal. App. 4th 191 (2002), rehearing denied, review denied.

Adhesion Contracts

The question remains as to how widespread these clauses can be, particularly when considering the ease of their enforcement and the vast consequence on your litigation.  The answer is the use of the clauses is ubiquitous.  This is particularly true in “adhesion” contracts, in which all the bargaining power is on one side, which are the typical contracts found in large manufacturer/retailer “take-it-or-leave-it” goods and services.  The chances are any agreement you are provided when purchasing a good or contracting a service, negotiated or not, contains a valid forum selection clause… and there may not be much you can do about it.

Generally, a forum selection clause within an adhesion contract will be enforced as long as the clause provided “adequate notice” to the party that he was agreeing to the jurisdiction cited in the contract.  Intershop, 104 Cal. App. 4th 191, 201-202, rehearing denied, review denied.

Of course, “adequate notice” does not mean that you must actually have read the clause.  For example, a California Court of Appeals ruled that it was not required for a passenger to have actually read or been aware of a forum selection provision in a cruise ticket contract in order to be bound by it, so long as he or she had an opportunity to review the contract before boarding.  Schlessinger v. Holland America, N.V., 120 Cal. App. 4th 552 (2004), as modified, review denied.

Even “boilerplate” forum selection clauses over which no negotiation was possible are enforceable, particularly if the term was not outside the plaintiff’s reasonable expectations.  Cal-State, 12 Cal. App. 4th at 1679.  Ultimately, even though you have had no negotiating power to change such a clause, by purchasing the good or service you are likely deemed to have agreed to it unless there was some “unfair use of superior power” in imposing the contract or purchase upon you.  Id.

Consequences

Without the excruciatingly gory details, the cost of a well-executed forum selection clause on litigation can be incredible.

Your additional cost necessitated by litigation in the forum selected may be massive, including additional local counsel, attorney travel costs, and your own personal expense and inconvenience.  This additional expense “is not part of the calculus” when considering whether a forum selection clause should be enforced.  America Online, 90 Cal. App. 4th at 19.

And this may be the least of your troubles…  Witness and expert expense will also likely exponentially increase, particularly with distance.  This presumes that you can convince them to favorably attend in the first place.

There is also the concern about being in someone else’s “hometown” court, in which local counsel is usually considered to have advantage, via prior experience with the particular court and/or arbiter of your matter, or simply knowing the custom and mores of the local jury pool.

Moreover, the law which guides your matter, and which will govern the decision in your case, differs from state to state, or even intra-state, and often follows the forum selected via a “choice-of-law clause” or otherwise.

Choice Of Law

Briefly, “choice-of-law clauses” are usually grouped together with forum selection clauses.  Generally, if a forum selection clause is upheld, the choice of law clause will also survive.

The California Supreme Court has held that if a choice-of-law provision exists, California courts apply the principles set forth in Restatement section 187, reflecting a strong policy favoring enforcement.  Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 465 (1992).  See also, Omstead, 473 F. Supp. 2d 1018, supra. The proper approach for determining the enforceability of a contractual choice-of-law provision is for the court to determine, first, whether the chosen state has a substantial relationship to the parties or their transaction, or whether there is any other reasonable basis for the parties’ choice of law, and if neither of these tests is met, the court need not enforce the parties’ choice of law.  Id.

However, if either test is met, the court must next determine whether the chosen state’s law is contrary to a fundamental policy of California, and if there is a fundamental conflict with California law, the court must determine whether California has a materially greater interest than the chosen state in the determination of the particular issue.  Id.

As you would expect, such a burden may be difficult to support.

Don’t just sign.  Negotiate!

Ultimately, when you are in a position to do so, you should carefully scrutinize the forum selection and choice-of-law clauses.  Consider these areas critical sections of your review.  If you have any concerns whatsoever, do not sign the agreement until you have had an opportunity to address the issue with your attorney and negotiate for a change!

If you have questions or need assistance with your legal matter in California or nationwide, our experienced attorneys can assist you.  Please contact us, or set up an appointment at our San Diego offices.