Jul 07, 2014

Recent U.S. Supreme Court Decisions Highlight the Importance of Forum-Selection Clauses and Corporate Structure

In two recent decisions, the U.S. Supreme Court demonstrated a strong commitment to the enforceability of forum-selection clauses and clarified the requirements for U.S. courts to exercise jurisdiction over foreign corporate entities. The Court’s rulings highlight the importance of valid forum-selection clauses, while signifying that careful structuring of activities may allow entities to better predict the forums in which they will be subject to suit.

In Atlantic Marine Construction Co. v. United States District Court, the Court held unanimously that valid forum-selection clauses will be honored in “all but the most exceptional cases.” In this case, a subcontractor filed suit in Texas against a general contractor, despite a subcontract forum-selection clause dictating that all claims would be litigated in Virginia. On appeal, the Supreme Court clarified the proper procedure for enforcing forum-selection clauses, holding that a motion to transfer under 28 U.S.C. § 1404(a) is appropriate. Defendants usually make Section 1404(a) motions at the earliest stage of litigation because objections as to venue can be waived. The Court held further that the same analysis regarding when such a motion should be granted applies regardless of whether the forum-selection clause specifies a federal, state, or foreign tribunal. Importantly, the Court asserted a strong policy favoring forum-selection clauses, dictating that a valid clause changes the “calculus” for granting a motion to transfer. Specifically, a forum-selection clause shifts the burden to the plaintiff who has filed to the case in a forum other than the bargained-for forum to establish that a transfer to the bargained-for forum is unwarranted, prohibits arguments premised on convenience and other private interests, and triggers the bargained-for forum’s choice-of-law rules. In sum, the Court’s rulings mean that forum-selection clauses will be enforced except under “extraordinary circumstances,” demonstrating the Court’s commitment to the predictability promoted by such clauses.

As the Supreme Court’s ruling in Atlantic Marine is limited to “contractually valid” forum-selection clauses, the decision highlights the importance of utilizing effective clauses that specify a desirable federal, state, or foreign forum in which disputes will be litigated. In a previous admiralty case, The Bremen v. Zapata Off-Shore Company, the Supreme Court held that while forum-selection clauses are presumed to be valid, they may be set aside if a party can “clearly show” that enforcing a clause would be unreasonable or unjust, or that a clause resulted from fraud or overreaching. In Bremen, the Court dictated that though negotiated clauses designed to bring “vital certainty” to transactions were more likely to be reasonable, clauses designed to force local parties to litigate local disputes in “remote” and “alien” forums would be viewed with greater scrutiny.  The Supreme Court again addressed forum-selection clauses in another admiralty case, Carnival Cruise Lines, Inc. v. Shute, holding that while forum-selection clauses within form contracts are also entitled to deference, such clauses are still subject to scrutiny for “fundamental fairness” and cannot be devised as a means of discouraging plaintiffs from bringing legitimate claims. While current Supreme Court precedent therefore dictates that parties possess a heavy burden in demonstrating that a forum-selection clause is contractually invalid, facts may exist in which this is the case, thereby creating a need for careful drafting to obtain the benefits of predictability.

The Court further demonstrated its commitment to predictability as to the location of lawsuits in Daimler AG v. Bauman.  That case involved the limits of general personal jurisdiction, or the ability of a state’s courts to hear claims against an entity unrelated to the entity’s activities in or “contacts” with that state. In this case, several Argentinian residents filed suit in California against Daimler, a German corporation, alleging Daimler’s Argentinian subsidiary collaborated with state forces during Argentina’s “Dirty War.” The Court rejected the argument that California possessed general jurisdiction over all claims against Daimler based upon the “substantial” activities of a subsidiary that distributed vehicles to California retailers, comprising 2.4% of Daimler’s overall global sales, and maintained multiple facilities within the state, instead holding that California courts lacked jurisdiction to hear the plaintiffs’ claims. Endorsing a narrow conception of general jurisdiction, the Court held that a state’s courts possess general jurisdiction only when a corporation’s contacts are so “continuous and systematic” as to make the entity “at home” in the state. As the Court emphasized, the standard forums possessing general jurisdiction over a corporation remain the state in which the corporation is incorporated, or the state in which it maintains its principal place of business. While not ruling definitively, the Court also suggested a subsidiary’s contacts may not easily be imputed to a parent corporation to find general jurisdiction. The Court rejected a test imputing contacts whenever the parent itself would be forced to provide the services rendered by the subsidiary. Daimler makes clear that the bounds of general jurisdiction are narrow, as demonstrated by the Court’s concern that expansive jurisdictional principles would prevent entities from structuring conduct to provide predictability as to where they are amenable to suit. Practically, by requiring a showing that an entity is either “at home” within the state or that a suit relates to an entity’s in-state activities, Daimler will likely narrow the states in which plaintiffs may attempt to bring suit.

Together, Atlantic Marine and Daimler make evident the U.S. Supreme Court’s policy towards favoring predictability and certainty in regards to venue and jurisdiction. By utilizing valid forum-selection clauses and by properly structuring operations in the United States, corporate entities will be better able to ensure litigation is brought only in venues of their choosing. SGR can assist clients with this objective by reviewing your company’s form business agreements and meeting with you to discuss your corporate and operational structures.

Share via
Copy link
Powered by Social Snap