Skip Page Banner  
Skip Navigation

An Emerging Trend in Enforcement of Forum Selection Clauses in Federal Court

Friday, August 9, 2013

By Sean A. Commons and Amanda V. Lopez, Sidley Austin LLP

For businesses that operate in multiple states or overseas, a forum selection clause can minimize the risk of being hailed into a distant and unfamiliar court, as well as trying a case before an unfavorable jury pool.

With careful research and drafting, a forum selection clause can be a powerful ally in your efforts to mitigate the expense and risks associated with litigation. But that is why such clauses often come under attack, as opponents attempt to regain the advantage of litigating in their chosen forum. For those unwilling to give up on forum selection clauses, an emerging body of federal court decisions offers hope, at least when litigating in federal court.

State and federal courts generally consider a forum selection clause presumptively reasonable so long as any party to the contract has maintained offices or conducted activities in the forum, or the contract was negotiated or performed in the forum.1 Most courts place the burden on the party opposing enforcement to demonstrate that a clause is unreasonable, particularly in disputes between sophisticated parties2 or in class actions,3where courts increasingly have rejected complaints of undue burden.

Opponents have adapted to the modern presumption favoring forum selection clauses by advocating for narrow interpretation of clauses;4 exploiting disagreements among state and federal courts about how to construe clauses;5 and by suing parents, subsidiaries, affiliates, or partners who were not parties to contracts containing the forum clause.6

Even when you and your client have drafted a clause to head-off attacks, the other side often can manufacture a fall-back argument—that enforcement would violate public policy because the designated forum has different procedural or substantive laws.

As a practical matter, it is impossible to account for every potential difference in the laws of the 50 states when drafting a forum selection clause. Fortunately, and perhaps for this very reason, courts generally do not consider any difference in the laws of two states sufficient to defeat a forum selection clause, even when transferring a case will impact the outcome or relief available.7 Indeed, many courts have upheld forum selection clauses notwithstanding an objector's assertion of claims based on unwaivable statutory rights,8 unless the statute in question explicitly forbids litigating outside of the forum.9

A number of state and federal courts, however, frequently refuse to enforce forum selection clauses when confronted with an objection that transfer could result in the loss of unwaivable or fundamental rights.10 The rationale offered by these courts is that, if parties cannot agree by contract to waive particular rights afforded under local law, then they should not be able to waive those rights through a forum selection clause.

These courts often find added justification for believing that a forum selection clause will violate a strong public policy of the local forum when a contract contains a choice-of-law clause,11 or when state courts in the designated forum do not, for example, permit class actions, punitive damages, or other remedies.12 In those circumstances, some courts assume that a transferee court will apply its local laws without regard to the public policies of the original forum.

Emerging Trend

An emerging body of federal district court decisions provides a straightforward and effective counterpoint to this line of authority, at least when seeking to transfer a case from one federal district court to another. “A forum selection clause determines where the case will be heard,” not the law that will govern once a case is transferred.13 The validity of a forum selection clause is “separate and distinct” from choice-of-law questions.14For choice of law to be relevant, one must assume that a judge in the transferee forum lacks either the ability “to address the legal issues related to” choice of law15 or the willingness to “safeguard” fundamental rights.16Neither assumption is appropriate or warranted,17 especially when the transferee forum is a co-equal federal district court judge.

In addition, depending on where the two district courts at issue sit, choice-of-law questions may be irrelevant because (1) the transferee court is required to apply the choice-of-law rules that would have governed in the transferor court;18 or (2) the jurisdictions share the same choice-of-law rules, likely due to expanded adoption of the Restatement (Second) of Conflicts of Law.19

As a result, defendants have yet another reason to consider whether to remove a case to federal court. By removing an action to federal court, you free the transferor court from having to make difficult predictions about whether differences in the laws of two states exist and, if so, whether those differences could unfairly disadvantage one of the parties in violation of public policy. And as an added bonus, you may find that the district court resolves challenges to the validity of a forum selection clause by applying federal common law instead of state law,20 further enhancing your chances of enforcing your agreements as drafted.

Sean A. Commons is a litigation partner in Sidley Austin LLP's Los Angeles office, where he represents companies faced with consumer class actions and complex litigation. Commons can be reached at scommons@sidley.com.

Amanda V. Lopez is an associate in Sidley's litigation group in Los Angeles, where she focuses on complex commercial litigation. Lopez is available at alopez@sidley.com.

©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

Disclaimer

This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

To view additional stories from Bloomberg Law® request a demo now