© 2013 The Texas Lawbook.
By Mark Curriden, JD
Senior Writer at The Texas Lawbook
(December 3) – The U.S. Supreme Court ruled in a Texas case Tuesday that companies can use contractual agreements with other businesses to dictate the courts in specific states where disputes between the companies must be resolved.
The unanimous opinion by the justices is a huge win for larger businesses operating in multiple states that want to litigate all their civil disputes in their home jurisdiction. But the decision is seen as a defeat for smaller mom-and-pop companies that do subcontracting work. It also significantly diminishes the power of U.S. District Court judges to decide forum selection disputes.
“When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties’ settled expectations,” Justice Samuel Alito wrote for the Court.
“A forum-selection clause, after all, may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms,” Justice Alito said. “It may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.”
Scott Hastings, a partner at Locke Lord in Dallas who argued the case before the Supreme Court, said the decision will lead more companies to include so-called forum selection clauses in their contracts with other businesses.
The Supreme Court decision comes in a case originally filed in 2010 in Austin by Killeen-based J-Crew Management, a five-person subcontracting business that provided labor and materials for the building of a child development center at Fort Hood. J-Crew claimed that Atlantic Marine, the primary contractor on the project, owed it for $160,000 for unpaid work and materials.
The Virginia business, Atlantic Marine Construction Company, pointed out that its contract with J-Crew mandated that all disputes between the companies must be decided by courts in its home state.
A federal judge in Austin ruled in favor of J-Crew, noting that transferring the case to Virginia would cause significant expense and inconvenience for nearly all the witnesses and parties in the litigation. The judge said that Atlantic Marine had not met its burden in showing why the case should be moved to Virginia.
The U.S. Court of Appeals for the Fifth Circuit upheld the trial court’s decision, but Judge Catharina Haynes, in a concurring opinion, said the forum-selection clause should be given greater weight and invited the Supreme Court to weigh in.
On Tuesday, the justices followed Judge Haynes’ recommendations.
“When the parties have agreed to a valid forum-selection clause, a district court should ordinarily transfer the case to the forum specified in that clause,” the justices ruled. “Only under extraordinary circumstances unrelated to the convenience of the parties should a §1404(a) motion be denied. And no such exceptional factors appear to be present in this case.”
Justice Alito wrote that the plaintiff’s “choice of forum merits no weight.”
“Rather, as the party defying the forum-selection clause, the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted,” the Court said. “Because plaintiffs are ordinarily allowed to select whatever forum they consider most advantageous (consistent with jurisdictional and venue limitations), we have termed their selection the ‘plaintiff’s venue privilege.‘
“But when a plaintiff agrees by contract to bring suit only in a specified forum— presumably in exchange for other binding promises by the defendant—the plaintiff has effectively exercised its “venue privilege” before a dispute arises,” Justice Alito wrote. “Only that initial choice deserves deference, and the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.”
The Supreme Court said that when parties “agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation.”
As a result, the justices said that district judges should deem the private-interest factors to weigh entirely in favor of the preselected forum.
“When J-Crew entered into a contract to litigate all disputes in Virginia, it knew that a distant forum might hinder its ability to call certain witnesses and might impose other burdens on its litigation efforts,” Justice Alito wrote. “It nevertheless promised to resolve its disputes in Virginia, and the District Court should not have given any weight to J-Crew’s current claims of inconvenience.”
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