Atlantic Marine: The Supreme Court on Exclusive Choice of Court Agreements

Yesterday the Supreme Court decided Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas (S. Ct. 2013). Atlantic Marine was a Virginia corporation with its principal place of business in Virginia. It had a contract with the Army Corps of Engineers to build a child development center at Fort Hood, Texas. Atlantic Marine subcontracted with J-Crew Management, Inc., a Texas corporation, for part of the work. The subcontract had a forum selection clause that provided for litigation of any disputes “in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.”

A dispute arose about payment, and J-Crew sued Atlantic Marine in the US District Court for the Western District of Texas. Atlantic Marine moved to dismiss the action under FRCP 12(b)(3), which provides that a motion to dismiss for “improper venue” may be made before answering, and 28 U.S.C. § 1406(a), which provides:

The district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.

In the alternative, Atlantic Marine moved to transfer the case to the Eastern District of Virginia under 28 U.S.C. § 1404(a), which provides:

For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.

The district court denied both motions. It first held that § 1404(a) was the exclusive mechanism for enforcing a forum selection clause if the forum the parties chose is federal.1 Applying a multi-factor test, the district court determined that Atlantic Marine had failed to show that the transfer would be in the interest of justice or that it would be convenient for the parties or witnesses.

Atlantic Marine sought a writ of mandamus from the Court of Appeals for the Fifth Circuit directing the district court to dismiss or transfer the case. The Fifth Circuit denied the petition, holding that § 1404(a) was the exclusive means of enforcing a forum selection clause where the chosen forum is federal, but that the district court had not abused its discretion in the application of that statute. Atlantic Marine sought review in the Supreme Court.

In a unanimous decision by Justice Alito, the Court reversed the Fifth Circuit’s judgment and remanded for further consideration. The Court agreed with the lower courts’ decision that § 1404(a) is the exclusive means for enforcing the forum selection clause. The gist of the reasoning is that it is only proper to dismiss a case for improper venue if the venue is “improper” (FRCP 12(b)(3)) or “wrong” (§ 1406(a)), and that venue is neither “improper” nor “wrong” if the court in which the plaintiff sued satisfies the requirements of the venue statutes:

Whether venue is “wrong” or “improper” depends exclusively on whether the court in which the case was brought satisfies the requirements of federal venue laws, and those provisions say nothing about a forum-selection clause.

The obvious problem with this reasoning, which Atlantic Marine pointed out to the Court, was that the district court lacks the power to transfer a case to a state or foreign court under § 1404(a). So if the district court cannot transfer the case and also cannot dismiss it, then there is potentially no way to enforce the clause. “We agree with Atlantic Marine,” Justice Alito wrote, “that the Court of Appeals failed to provide a sound answer to this problem.” The answer the Court gives: a forum selection clause that points to a state or foreign court must be enforced through the doctrine of forum non conveniens, which is partly codified in § 1404(a) but which continues to have a residual common-law application in the federal courts, particularly in transnational cases.

The Court went on to hold that the district court had applied the wrong standards when weighing the § 1404(a) factors. The parties’ choice of forum should be “given controlling weight in all but the most exceptional of cases.” Therefore, the ordinary multi-factor test is modified when the parties have entered into a valid choice of forum agreement, and the ordinary effect of a transfer must be modified, too. First, the plaintiff’s choice of forum, which ordinarily merits much weight, has no weight in the analysis:

[W]hen a plaintiff agrees by contract to bring suit only in a specified forum [ellipsis] the plaintiff has effectively exercised its “venue privilege” before a dispute arises. 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.

Second, the parties’ private interests, which ordinarily merit consideration, have no weight for essentially the same reasons. Thus the only factors the court can consider are factors relating to the public interest.

Third—and this gets a little complicated—ordinarily a federal court exercising its diversity-of-citizenship jurisdiction must apply the conflict of laws rules of the state in which it sits. But there is a traditional exception to this rule: when a case is transferred from one district to another under § 1404(a), the traditional exception requires the court to which the action is transferred to apply the conflict of laws rules that would have been applied by the court in which the action originated, in order to avoid monkey business. Now, however, the Court found it necessary to make an exception to the exception, so that in cases transferred from one district to another under § 1404(a) on account of a forum selection clause, the court to which the action is transferred will apply the conflict of laws rules that it would have applied had the action been commenced there, i.e., the conflict of laws rules of the state where the court sits. This seems sound as a means, again, of avoiding monkey business.

Of particular importance to Letters Blogatory readers is footnote 8 of the decision, which makes it clear, albeit in a dictum, that the same standards that the Court has announced in § 1404(a) cases involving exclusive choice of court agreements will also apply in forum non conveniens cases involving such agreements:

For the reasons detailed above, the same standards should apply to motions to dismiss for forum non conveniens in cases involving valid forum-selection clauses pointing to state or foreign forums. We have noted in contexts unrelated to forum-selection clauses that a defendant invoking forum non conveniens ordinarily bears a heavy burden in opposing the plaintiff’s chosen forum. That is because of the harsh result of that doctrine: Unlike a § 1404(a) motion, a successful motion under forum non conveniens requires dismissal of the case. That inconveniences plaintiffs in several respects and even “makes it possible for plaintiffs to lose out completely, through the running of the statute of limitations in the forum finally deemed appropriate.” Such caution is not warranted, however, when the plaintiff has violated a contractual obligation by filing suit in a forum other than the one specified in a valid forum-selection clause. In such a case, dismissal would work no injustice on the plaintiff.

(Slip op. at 15-16) (citations and internal quotation marks omitted).

I have to say that the decision strikes me as very well-reasoned. There is surprisingly little to critique, and the distinction the court draws between venue on the one hand and the effect of contractual agreements as to forum on the other is useful. The decision also avoids creating any real potential for trouble once the United States ratifies the Convention on Choice of Court Agreements, either as a matter of substance or as a matter of procedure. Under Article 6 of COCA:

A court of a Contracting State other than that of the chosen court shall suspend or dismiss proceedings to which an exclusive choice of court agreement applies unless—

  1. the agreement is null and void under the law of the State of the chosen court;
  2. a party lacked the capacity to conclude the agreement under the law of the State of the court seised;
  3. giving effect to the agreement would lead to a manifest injustice or would be manifestly contrary to the public policy of the State of the court seised;
  4. for exceptional reasons beyond the control of the parties, the agreement cannot reasonably be performed; or
  5. the chosen court has decided not to hear the case.

Grounds (a) and (b) relate to the validity of the choice of court agreement, and I don’t consider them here. It may be that the remaining grounds are not perfectly coextensive with the doctrine of forum non conveniens as, under the new decision, it must be applied in cases where the parties have made an exclusive choice of court agreement. Thus there may be cases that a US court would dismiss today that it would be unable to dismiss once the Convention is implemented, and there may be cases that a US court would not dismiss today that it would be required to dismiss or stay once the Convention is implemented. But in general, these seem like highly improbable and speculative possibilities. As to procedure, the Convention is silent about how a state goes about carrying out its obligation to suspend or dismiss a case brought in the wrong forum, and so the Court’s reliance on forum non conveniens to get the job done seems entirely compatible with the Convention.

  1. This limitation is important because a district court can transfer an action only to another federal court, not to a state or foreign court.

One response to “Atlantic Marine: The Supreme Court on Exclusive Choice of Court Agreements”

  1. […] found the agreement to arbitrate valid and found that Dahman had failed to show, as required by the Atlantic Marine case, that “public-interest factors overwhelmingly disfavor a transfer.” I won’t delve […]

Leave a Reply

Your email address will not be published. Required fields are marked *

Thank you for commenting! By submitting a comment, you agree that we can retain your name, your email address, your IP address, and the text of your comment, in order to publish your name and comment on Letters Blogatory, to allow our antispam software to operate, and to ensure compliance with our rules against impersonating other commenters.