Following the United States Supreme Court’s decision in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), many Circuit courts have held that a valid forum-selection clause renders venue “improper” in a forum other than the one designated by contract. This term, the U.S. Supreme Court will address whether forum-selection clauses in contracts warrant dismissal or transfer of a case filed in an appropriate federal venue but in contravention of the forum-selection clauses. In many circuits, forum-selection clauses are routinely enforced through motions to dismiss or transfer venue under Federal Rule of Civil Procedure 12(b) (3) and 28 U.S.C. § 1406. The 3rd, 5th, and 6th circuits, however, follow a contrary rule that has its origins in the U.S. Supreme Court’s decision in Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988). This rule states that when forum-selection clauses designate a specific federal forum, the clauses are enforced through motions to transfer under 28 U.S.C. § 1404(a). Under this view, courts which review these motions undertake a discretionary, balancing-of-conveniences analysis.
To resolve this Circuit split and to clarify Stewart, the court has granted certiorari to Atlantic Marine Construction Co. v. USDC WD TX, 12-929. General contractor Atlantic Marine Construction Co. and a subcontractor J-Crew Management Inc. entered into a subcontractor agreement for a construction project in Texas. The subcontract contained a forum-selection clause requiring litigation in Virginia. The subcontractor sued the general contractor in Texas District Court for failing to make payments under the subcontract. The general contractor responded by seeking dismissal or transfer based on the subcontract’s forum-selection clause. Both the District Court and the 5th Circuit Court of Appeals refused to grant dismissal or transfer the case to a Virginia court, reasoning that (1) Stewart mandated federal courts apply Section 1404(a) balancing-of-conveniences analysis to forum-selection clauses; and (2) the general contractor failed to meet its burden of showing that the interest of justice or the convenience of the parties and their witnesses weighed in favor of transfer under Section 1404(a). In re Atlantic Marine Const. Co., Inc., 701 F.3d 736, 737, 739, 743 (5th Cir. 2012).
Circuit Judge Haynes filed a special concurrence and argued that because 28 U.S.C. § 1391 (the general federal venue statute) does not mandate venue in a particular forum in federal cases, the parties’ bargained for forum-selection clauses designate the correct forum. Therefore, alternative venues are “wrong,” triggering the routine application of Rule 12(b) (3) and Section 1406 to dismiss or transfer venue. Id. at 745. Judge Haynes also noted that “negotiation of a forum-selection clause involves various economic decisions and often requires a party to make concessions in exchange for the assurance that potential litigation will occur in a pre-determined venue. Companies . . . that conduct business throughout a broad geographical area rely on forum-selection clauses to ensure that they can anticipate business costs and avoid litigation in a plethora of possible venues.” Id. at 748. Finally, Judge Haynes asserted that the 5th Circuit’s majority opinion misread Stewart and suggested that the “parties request review of today’s decision by the United States Supreme Court.” Id. at 745-747, 749. The parties did just that, and the Supreme Court agreed to hear the case.
The Supreme Court heard oral arguments Oct. 9. Atlantic Marine took the position that the courts should enforce forum-selection clauses as written and only apply the Section 1404 balancing-of-conveniences analysis in Stewart when one of the parties waives its objection to proper venue or in “exceptional circumstances” where “public interest required something other than the contract clause.” (Transcript, p. 6, l. 5-18). J-Crew took the contrary position that the correct venue was the court where the dispute took place, and that Stewart required these courts to apply a balancing-of-conveniences analysis under Section 1404(a) in reviewing forum-selection clauses that designate an alternative forum.
The justices’ comments during oral argument signaled their approval of Atlantic Marine’s position. In response to J-Crew’s argument that venue was proper in Texas because that is “where we performed our work, where the project is located, where all the witnesses reside, and virtually all of the evidence is located,” Justice Kagan stated, “But, Mr. Allensworth, where you agreed not to bring it . . . this was a negotiated contract . . . You have to live with your contract.” (Transcript, p. 26, l. 17-23; p. 27, l. 4-5, 12-13). Justice Scalia agreed, stating that “it seems to me terribly unfair” to not enforce the forum-selection clause that the parties agreed to. Id. at 46, l. 1-11. Justices Alito, Kagan and Sotomayor were unconvinced by the Texas District Court’s “interests of justice” analysis under Section 1404(a), stating that the “interests of justice that the district court weighed almost all boiled down to the interests of your client [J-Crew]” and did not constitute “public interests” such as the integrity of the judicial system. Id. at 28, l. 1-4, 11-13; Id. at 34, l. 2-18; Id. at 47, l. 22-25; Id. at 48, l. 2-3. Chief Justice Roberts echoed Judge Haynes’ reasoning below, arguing that discretionary 1404(a) analysis would “be throwing a significant wrench into the process” of companies doing business nationwide by creating uncertainty in dispute resolution fora. Id. at 35, l. 6-24.
One issue that may not be resolved by the Supreme Court’s pending decision is cases brought under the Miller Act, 40 U.S.C. §§ 3131, et. seq. Unlike Atlantic Marine, where venue in Texas was discretionary, the Miller Act requires an action to be filed in the federal court where the construction project was located (40 U.S.C. §3133(b) (3)(B)). Lower courts are split on whether a forum-selection clause overrides the Miller Act’s mandatory venue requirements. Compare United States ex. rel. Brown Minneapolis Tank Co. v. Kinley Const. Co., 816 F.Supp.2d 1139 (D. New Mexico 2011) with In re Fireman’s Fund Companies, 588 F.2d. 93 (5th Cir. 1979).
Indiana Trial Rule 75 governs venue for cases filed in state court and by analogy Trial Rule 75 comports with Atlantic Marine’s view. A complaint can be filed in any county in Indiana, but if it is not filed in a county of preferred venue, it must be transferred to a county of preferred venue upon timely motion. Sunburst Chemical LLC v. Acorn Distributors, Inc., 922 N.E.2d 652, 653 (Ind. Ct. App 2010). In Sunburst, the plaintiff sued two defendants in Marion County based on a contract that provided that the defendants agreed that “jurisdiction” for any claim was Marion County. Without the contract provision, preferred venue only would have been Allen County. The Indiana Court of Appeals held that the contract provision allowed the plaintiff to sue the defendants in Marion County. Id. at 654.
The court’s decision in Atlantic Marine should clarify the landscape of venue and will likely hold that District courts shall not engage in a balancing of conveniences analysis when there is a freely negotiated forum-selection clause.•
Sam Laurin is a partner of Bose McKinney & Evans LLP, where he serves as the chair of the firm’s litigation group, as well as the chair of the firm’s construction law group. He focuses his practice on litigating construction and real estate disputes. John Huang is an associate in the litigation group and represents clients in commercial, education and constitutional litigation matters.