U.S. Supreme Court to Take on Forum-Selection Clauses

The U.S. Supreme Court recently agreed to consider another key business case. Atlantic Marine Construction Company v. J-Crew Management involves whether federal courts should be required to enforce a forum-selection clause in business contracts.

The specific issue before the Court is what happens when one party files a lawsuit in a venue other than as contractually agreed by the parties in the forum-selection clause.  In the current lawsuit, the contract between J-Crew Management and Atlantic Marine Construction Company required disputes to be resolved in the state or federal court in Norfolk, Virginia. When J-Crew ignored such requirement by filing suit in Texas, Atlantic Marine sought to dismiss or transfer the lawsuit.

Federal courts have reached divergent opinions on what venue statute should apply to such motions. Under 28 U.S.C. § 1406(a), if a lawsuit is filed in the incorrect venue, the district court must dismiss it or transfer it to a proper venue. Under 28 U.S.C. § 1404(a), if the lawsuit is filed in a proper venue, the court may transfer it to another proper venue “[f]or the convenience of the parties and witnesses, in the interest of justice.”

In a split decision, the Fifth Circuit ruled against Atlantic Marine. It interpreted the Supreme Court’s decision in Stewart Organization Inc. v. Ricoh Corp. to require that courts rely on 28 U.S.C. §1404(a) to decide a motion to transfer to another federal court based on a forum-selection clause. It further held that “private parties should not have the power to transcend federal venue statutes that have been duly enacted by Congress and render venue improper in a district where it otherwise would be proper under congressional legislation.”

While the majority of federal circuit courts have granted motions to enforce valid forum-selection clauses, the Third, Sixth and Seventh circuits also favor the Fifth Circuit’s approach. This divergence of approach and opinion has created considerable uncertainty for the courts and contract parties with sufficient bargaining power to determine the venue for dispute resolution.  Accordingly, the justices have been asked to address and resolve this rift among the circuits.

The case will be considered in the October 2013 term.  Please stay tuned for updates.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Gary Young, or the Scarinci Hollenbeck attorney with whom you work.