Forum selection clause: what if it names a court far away?

What if the vendor agreement your company signed two years ago says every dispute "shall be brought exclusively" in a court several states away, and now there's a dispute? That sentence is a forum selection clause: a contract term in which the parties agree, in advance, on the court or the place where their disputes will be heard.

It usually sits near the back of the document, and in our experience it's rarely the sentence anyone negotiates. Yet it often decides how expensive a dispute will be, and sometimes whether a claim is worth pursuing at all.

A word on scope first. This article describes how federal courts treat these clauses, based on U.S. Supreme Court decisions and the federal venue statutes. Oklahoma has three federal judicial districts under 28 U.S.C. § 116 (Northern, Eastern and Western), and those courts apply the rules below.

We don't describe how Oklahoma state courts or Texas state courts treat forum selection clauses under state law. That's a separate body of law, we didn't review it for this piece, and nothing below should be read as a statement of it.

The setup: a hypothetical supply contract

Take a hypothetical, invented for illustration. An Oklahoma City manufacturer signs a supply agreement on the vendor's form. The vendor is headquartered in another state, and Section 22 says any suit "arising out of or relating to" the agreement shall be brought exclusively in the state or federal courts sitting in the vendor's home city.

Two years later, the vendor delivers equipment that the manufacturer says doesn't work, and about $100,000 is in dispute. The owner's instinct is to sue at home, where the equipment sits and the employees who can testify about it live.

Where each side files first

The manufacturer can file wherever a clerk will accept the complaint. Filing in a court isn't the same as staying there.

Suppose it sues in Oklahoma state court. Under 28 U.S.C. § 1441(a), a defendant may remove a civil action from state court to the federal district court where the case is pending, if the federal court would have had original jurisdiction over it. One source of that jurisdiction is 28 U.S.C. § 1332(a), which covers suits between citizens of different states where the amount in controversy exceeds $75,000, exclusive of interest and costs.

So an out-of-state vendor facing a claim of this size often has a path into federal court. Had the vendor sued first in the court its contract names, the Oklahoma company would simply be the one traveling.

Here's what we see in practice: the forum clause tends to get read for the first time at exactly this stage, when someone asks where the lawsuit can be filed. By then it has stopped being a negotiating point.

The motion that follows

Once the case is in an Oklahoma federal court, the vendor's lawyers will ask the judge to send it to the forum the contract names. Which motion they use, and what standard applies, was addressed in Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, decided December 3, 2013, in a unanimous Supreme Court opinion by Justice Alito.

A Virginia contractor building a child-development center at Fort Hood, Texas, hired a Texas subcontractor under a contract saying disputes "shall be litigated in" a state court in Norfolk, Virginia, or the Norfolk Division of the federal court there. When a payment dispute arose, the subcontractor sued in the Western District of Texas instead.

The District Court refused to move the case, treating the clause as one factor among several and giving weight to the expense of getting witnesses to Virginia. The Fifth Circuit left that ruling in place, and the Supreme Court reversed.

The contract doesn't make venue "wrong"

Venue is the question of which federal district a case may properly be filed in. The contractor argued that the clause made Texas the wrong venue, which would call for dismissal or transfer under 28 U.S.C. § 1406(a), the statute for cases filed in the wrong district.

That route failed. Whether venue is wrong depends on the federal venue laws, chiefly 28 U.S.C. § 1391(b), which looks to things like where a defendant resides and where a substantial part of the events behind the claim occurred. The Court said a forum clause "has no bearing" on that question.

Transfer is the tool when the clause names a federal court

Under 28 U.S.C. § 1404(a), "for the convenience of parties and witnesses, in the interest of justice," a district court may transfer a civil action to another district where it might have been brought "or to any district or division to which all parties have consented." The Court held that a clause pointing to another federal district may be enforced by a motion to transfer under that section. It declined to consider whether a defendant could instead use Rule 12(b)(6) of the federal civil rules to enforce a clause, a question the parties hadn't briefed.

A clause naming only a state court works differently

Section 1404(a) moves cases between federal courts. For a clause that points to a state court or a foreign one, the Court said the mechanism is forum non conveniens, a doctrine that lets a court decline a case that belongs in a different forum, and the same standards apply.

The remedy is not the same. A successful forum non conveniens motion, the opinion notes, "requires dismissal of the case." The Court acknowledged that dismissal can cost a plaintiff its claim through the running of a statute of limitations, then added that when a plaintiff has violated a valid clause, "dismissal would work no injustice on the plaintiff."

For a company that files in the wrong place late in its limitations period, then, the problem may no longer be only about travel.

How a federal judge weighs a forum selection clause

Without a forum clause, a § 1404(a) motion is a balancing exercise. The judge considers private interests, such as access to proof and the cost of bringing witnesses, alongside public interests, such as court congestion and the local interest in having local controversies decided at home.

According to Atlantic Marine, a valid clause changes that analysis in three ways.

First, the plaintiff's choice of forum "merits no weight." The party defying the clause bears the burden of showing that transfer to the agreed forum is unwarranted. The District Court had placed that burden on the party asking for transfer, and the Supreme Court called it an error.

Second, the judge "should not consider arguments about the parties' private interests." By agreeing to the clause, the Court reasoned, the parties "waive the right to challenge the preselected forum" as inconvenient for themselves or their witnesses.

This is the change that surprises people most. The argument that feels strongest to an owner, that the people and the equipment are here, is the one the judge has been told not to weigh. Only the public-interest factors remain, and the Court said those "will rarely defeat a transfer motion."

Third, the law that would otherwise travel with the case stays behind.

What moves with the case, and what doesn't

Choice-of-law rules are the rules a court uses to decide which state's substantive law governs a dispute. Ordinarily, the Court explained, when a case is transferred under § 1404(a) the receiving court applies the choice-of-law rules of the state where the case was first filed.

A plaintiff who files in defiance of a valid forum clause loses that carryover. In the Court's words, the transfer "will not carry with it" the original venue's choice-of-law rules. The Court's stated concern was that the transfer statute shouldn't create opportunities for forum shopping.

The Court summed up the standard by quoting Justice Kennedy's concurrence in an earlier case, Stewart Organization, Inc. v. Ricoh Corp.: a valid clause should be "given controlling weight in all but the most exceptional cases." In the Court's own words, a district court should transfer the case unless "extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer."

Even so, the Court didn't order the transfer itself. It sent the case back for the lower courts to decide whether any public-interest factors supported keeping it in Texas.

Its reason for the strict rule is one an owner can appreciate from either side of a deal. A forum clause, the Court wrote, "may have figured centrally in the parties' negotiations and may have affected how they set monetary and other contractual terms."

What's left to argue

All of this assumes the clause is valid. In a footnote, the Court said its analysis "presupposes a contractually valid forum-selection clause," and it didn't decide what makes a clause valid.

So validity is where a resisting party's real arguments live. An older Supreme Court reference point is M/S Bremen v. Zapata Off-Shore Co., a 1972 admiralty (maritime) case about an international towing contract that sent disputes to a court in London.

There the Court said forum clauses "are prima facie valid" and should be enforced unless the resisting party shows that enforcement would be "unreasonable" under the circumstances. The grounds it discussed include "fraud or overreaching" and enforcement that would "contravene a strong public policy of the forum" where the suit was filed.

Inconvenience can matter too, but the bar the Court described is high: the agreed forum must be "so gravely difficult and inconvenient" that the party would, for practical purposes, be "deprived of his day in court." Bremen stated its rule for federal courts sitting in admiralty, and we're not describing here how far it reaches beyond that setting.

"It was their form; we never negotiated it"

In Carnival Cruise Lines, Inc. v. Shute, a 1991 admiralty case, a Washington State couple sued in Washington over an injury on a cruise. Their ticket was a form contract with a clause requiring suit in Florida, and the Court enforced it.

The opinion did say that forum clauses in form passage contracts "are subject to judicial scrutiny for fundamental fairness," and it found no indication of bad faith in the choice of Florida and no evidence that the clause was obtained by "fraud or overreaching." Fairness review exists, in other words, but it isn't a second chance to negotiate.

The same clause from the other chair

Everything above reads as bad news for the Oklahoma manufacturer. Change one fact and it reads the other way.

If your company is the seller, owed money by a customer in another state, your own home-court clause is what helps keep a collection suit in Oklahoma City or Tulsa instead of the customer's hometown. We've written separately about what enforcing a contract really takes, and the forum is a large part of that math.

A home-court clause is also a concession with a price. The side that gets it often gave something up elsewhere in the deal, or had the bargaining position not to. That's the vendor's fair point, and it's the one the Supreme Court credited.

What the clause should have said: the drafting questions we ask

What follows is drafting practice, not a statement of law. We didn't review authority for this article on how courts read particular wording. These are the points we'd want settled before a signature goes on the page.

• Mandatory or permissive. "Shall be brought exclusively in" reads differently from "may be brought in." If the parties mean the named court to be the only one, we'd want the clause to say so in plain words.
• Scope. "Arising under this agreement" is narrower on its face than "arising out of or relating to." We ask whether claims connected to the deal, but not strictly for breach of it, are meant to be included.
• State court or federal court. As Atlantic Marine shows, the answer affects whether a misfiled case gets transferred or dismissed. We also check whether a federal court sits where the clause points. Section 116 lists where each Oklahoma district holds court, including Oklahoma City and Lawton for the Western District and Tulsa for the Northern.
• Fit with the choice-of-law clause. A forum in one state paired with the governing law of another means a judge applying another state's law, so we read the two clauses together.
• Fit with the other dispute terms. A jury waiver or an arbitration clause changes what's left for any court to decide, and the forum clause should say what it applies to.
• The controlling document. Purchase orders and acknowledgment forms often carry their own terms, sometimes with a different forum. Which set governs can become a dispute of its own.

At signing, the forum is a business term like any other. It can be traded for a neutral location, or for a rule that each side must sue in the other's home court. After the dispute starts, a valid clause in federal court is close to controlling, and the room to trade is mostly gone.

It also changes the value of the claim itself. A $100,000 dispute that has to be litigated several states away is a different asset from the same dispute at home, and that belongs in any honest analysis of when to settle and when to fight.

If you're reviewing a contract that sends disputes to another state, or a dispute has already arrived under one, we're glad to talk it through. You can reach us through the contact page or at our Oklahoma City office. Reading one sentence carefully before signing usually costs far less than litigating around it afterward.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.