Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas

Facts

In April 2009, Atlantic Marine Construction Company (“Atlantic”) entered into a construction contract with the Army Corps of Engineers to build a child development center at Fort Hood, Texas. Related to this agreement, Atlantic subcontracted with J-Crew Management, Inc. (“J-Crew”), which agreed to provide construction materials and labor. The agreement between Atlantic Marine and J-Crew included a forum-selection clause, limiting the places where the parties could bring suit in the event of a dispute. The forum-selection clause identified only two courts located in Virginia as possible venues.

J-Crew alleges it fully performed its obligations under the contract, but claims that Atlantic breached the contract by not paying J-Crew for its services. J-Crew filed suit in the Western District of Texas. Contending that the forum-selection clause required J-Crew to bring the suit in one of the two specified Virginia courts, Atlantic moved to dismiss the case under Federal Rule of Civil Procedure 12(b)(3) or to transfer the case under 28 U.S.C. § 1406(a). Atlantic also moved in the alternative under 28 U.S.C. § 1404(a) to transfer the suit to Virginia. Rule 12(b)(3) and § 1406(a) cover situations in which venue is “improper” or “wrong,” while §1404(a) provides for transfers for reasons of convenience and justice where the forum is otherwise proper.

The district court decided that Atlantic should attempt to enforce the forum-selection clause through §1404(a), not §1406(a) or Rule 12(b)(3). The district court further held that under § 1404(a), Atlantic bore the burden of proof and that it failed to show that transfer was justified.

In an attempt to compel the district court to dismiss or transfer the case to Virginia, Atlantic petitioned the Fifth Circuit Court of Appeals for a writ of mandamus. The Fifth Circuit denied the writ, upholding the district court’s use of § 1404(a). In so doing, the Fifth Circuit held that the Supreme Court’s decision in Stewart Organization, Inc. v. Ricoh Corp.dictated that where the original venue is statutorily sound, courts should enforce forum-selection clauses through § 1404(a). The Fifth Circuit also addressed the issue of burden of proof under § 1404(a) and upheld the district court’s decision to allocate the burden to Atlantic, the moving party.

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Discussion

Atlantic contends that courts should enforce contracts as written, including forum-selection clauses. In opposition, J-Crew argues that a privately drafted forum-selection clause cannot negate statutorily sound venues. The Supreme Court’s decision in this case will affect the manner in which parties may enforce forum-selection clauses, including attempts by private parties to contract around federal venue statutes and dictate the choice-of-law governing a case by filing their case first.

FORUM SHOPPING

Atlantic contends that enforcement of forum-selection clauses solely under § 1404(a) would encourage parties to forum-shop, potentially breaching contracts that contain forum-selection clauses. Forum shopping occurs when a party attempts to bring suit in a court that it believes will treat its claims favorably. Forum-selection clauses, however, limit the possible venues in which a party may bring suit. Atlantic argues that by filing in a venue not included in the forum-selection clause, a party breaches the contract. In addition, Atlantic argues that failing to enforce a forum-selection clause will cause a “race to the courthouse,” in which a party might prematurely initiate litigation for fear of being sued in a less hospitable forum.

Atlantic and the U.S. Chamber of Commerce point out that a transfer under § 1404(a) allows parties to bring with them the choice-of-law rules of the original filed court, regardless of the location of the transferee court. They argue that this creates an incentive for parties to file suit in a different forum so that they can control the choice-of-law even if they fail to keep the case in the original forum itself. In this way, Atlantic and the Chamber of Commerce contend that enforcing forum-selection clauses via § 1404(a) transfer would frustrate the parties’ contractual expectations and produce various economic harms that forum-selection clauses are designed to avoid.

On the other hand, J-Crew argues that allowing § 1404(a) to govern the transfer of forums where the original forum is proper under the federal venue statue but not under the private contract, will actually curtail and reduce forum shopping. As J-Crew sees it, forum-selection clauses are really just forum shopping by the party with superior bargaining power. J-Crew argues that enforcing these clauses through the § 1404(a) balancing test—used by judges to determine whether a case should be transferred to a different venue—will force parties to contemplate the public interest at the drafting stage and will limit the forums contracted for to those approved by Congress.

PRIVATE CONTRACTING AROUND FEDERAL STATUTES

Atlantic argues that, because venue is primarily a matter of convenience, and because objections to venue can be waived, that parties’ prior contractual agreements as to venue should be enforced as written and should trump statutory venue provisions. Atlantic points out that state and federal courts have recognized the right to determine venue via contract. Atlantic argues that the strong presumption in support of enforcing a forum-selection clause places a high burden on a party trying to argue against its enforcement.

In opposition, J-Crew argues that the enforcement of forum-selection clauses under § 1406(a) or Rule 12(b)(3) would effectively allow private parties to invalidate federal statutes defining proper venue. There is no evidence, in J-Crew’s view, that Congress had any intention of allowing private parties to disregard the venue statute’s provisions. Thus, according to J-Crew, Atlantic’s argument begins from a faulty premise.

In support of J-Crew, the American Subcontractors Association (“ASA”) contends that where state law forbids the enforcement of forum-selection clauses, a district court should abide by this rule. To hold otherwise, ASA argues, would run contrary to federalism principles and allow private parties to undermine states’ chosen policies.

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Analysis

In this case, the Court will resolve a circuit split regarding the impact of forum-selection clauses on venue. Several of the Courts of Appeals, and the parties in this case, disagree as to whether a forum-selection clause may render an otherwise proper venue “wrong” for the purposes of 28 U.S.C. § 1406(a). If not, then the forum-selection clause may be only one of several factors a court weighs when considering a change of venue under 28 U.S.C. § 1404(a). In addition, the Court will determine which party bears the burden of proof when seeking to enforce or avoid a forum-selection clause.

ENFORCEMENT OF FORUM-SELECTION CLAUSES

Atlantic argues that the practice of selecting venue by contract is well-established and reflects the purpose of venue statutes, which Atlantic suggests are designed to enhance the convenience of litigation for both parties and protect defendants from litigation in unreasonable forums. Atlantic notes the pervasiveness of forum-selection clauses, which are now common features of a wide array of contracts. Atlantic suggests they are appearing with such frequency in response to the Court’s decision in M/S Bremen v. Zapata Off-Shore Co., which clearly establishes a strong presumption in favor of enforcement. In addition to these practical and precedential arguments, Atlantic argues that a plain language reading of “wrong” or “improper” would include a lawsuit filed in violation of a contractually agreed upon location. Accordingly, Atlantic argues, when a party files a suit in any forum other than one specified in the contract, it has filed the suit in the “wrong” venue for purposes of § 1406(a). Accordingly, according to Atlantic, § 1406(a) and Rule 12(b)(3) require the court to either dismiss or transfer the case.

In contrast, J-Crew points out that Congress has directed that whether venue is proper should be determined according to 28 U.S.C. § 1391, and argues that private agreements may not make improper a venue that is proper under that statute. J-Crew contends that the statutory language makes clear that Congress intended for venue to be determined solely by statute and did not intend for private parties to limit the list of permissible venues. Further, J-Crew argues that Atlantic’s argument relies on an overly broad interpretation of what a “wrong” venue means. J-Crew notes that neither party in this case suggests that J-Crew filed the suit in a statutorily improper venue as defined by 28 U.S.C. § 1391, which allows for lawsuits to be brought in one of three venues: (1) the judicial district where the defendant resides; (2) the “judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of the property that is the subject of the action is situated;” or (3) if there is no other available district, any district where any defendant is subject to the personal jurisdiction of the federal courts regarding the action. J-Crew argues that because the case was filed in the district where “a substantial part” of the relevant events took place, the venue was valid according to the provisions of § 1391(b). Thus, J-Crew insists that the correct approach is to consider a forum-selection clause as one of several factors in determining whether to transfer, dismiss, or retain the case under § 1404(a), which allows courts to transfer “for the convenience of parties and witnesses, in the interest of justice” when a lawsuit has been filed in a proper venue.

J-Crew relies upon the Court’s decision in Stewart Organization, Inc. v. Ricoh Corp. to argue that in cases filed in statutorily proper venues, transfer requests must be assessed under § 1404(a), even if the chosen venue violates a forum-selection clause. J-Crew further argues that the Supreme Court should affirm the courts below, which balanced relevant factors in the § 1404(a) test, including the presence of a forum-selection clause. J-Crew argues that while Stewart and M/S Bremen v. Zapata Off-Shore Co. dictate that a forum-selection clause should be granted significant weight, a clause alone is not dispositive regarding proper venue.

Professor Stephen Sachs agrees that courts should not allow parties to contract around statutorily proper venue. Professor Sachs addresses Atlantic’s argument by arguing that, even if a defendant may waive its objection to improper venue, it does not follow that the parties may agree, by contract, that venue does not lie in a certain forum. Rather, Professor Sachs argues that a valid and enforceable forum-selection clause offers an affirmative defense that the defendant may raise before trial. Professor Sachs argues that the affirmative defense procedure is the most natural and practical reading of the Federal Rules of Civil Procedure as well as the Court’s own precedent.

BURDEN IN MOTIONS TO TRANSFER VENUE

The question of burden arises in several different contexts in this case. First, Atlantic argues that a forum-selection clause forms part of a contract between the parties on the matter of venue, and, as such, can only be avoided under the standards the Supreme Court elaborated in Bremen; namely, the party seeking to avoid the forum-selection clause must meet a “heavy burden” to demonstrate that the clause is unenforceable. Atlantic thus argues that an analysis under § 1404(a) skips the crucial step of forcing J-Crew to meet its burden in demonstrating that departure from the contractually chosen forum was appropriate. J-Crew contends that this argument is misguided because private parties do not have the right to contractually limit proper venue established by statute and that the question of burden only arises in regard to the relative weighing of factors under the § 1404(a) analysis.

Instead, J-Crew argues that the most significant question of burden is the one regarding the appropriate application of a § 1404(a) motion to transfer. J-Crew points out that, on the question of who bears the burden in § 1404(a) motions to transfer venue in cases involving a forum-selection clause, the circuits are split—the Fifth and Ninth Circuits place the burden on the movant to justify transfer, while the Third and Eleventh Circuits shift the burden to the party looking to escape transfer. Atlantic joins the Third and Eleventh Circuits in maintaining that the party seeking to avoid the forum-selection clause must bear the burden in proving that transfer is warranted and that venue contrary to the forum-selection clause is appropriate. In this view, a party must prove that the clause itself is unenforceable, not simply inconvenient. J-Crew joins the Fifth and Ninth Circuits in arguing that the courts below properly placed the burden on the moving party to demonstrate that transfer away from a statutorily proper venue was appropriate under the § 1404(a) balancing test.

Atlantic argues that even if the Supreme Court accepts the appellate court’s application of § 1404(a), it should still reverse because the lower courts did not properly weigh the significance of the forum-selection clause. Specifically, Atlantic argues that prior Supreme Court cases have demonstrated that the presence of a forum-selection clause should be given significant weight in the balancing analysis, such that the clause is presumptively enforced absent extraordinary circumstances.

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Conclusion

This case will resolve the circuit split regarding the enforceability of forum-selection clauses in private contracts. Specifically, the Supreme Court will determine whether a § 1404(a) or § 1406(a) transfer is appropriate when a lawsuit is filed in a forum other than one specified in a forum-selection clause. This implicates the ability of private parties to contract around federal statutes, raising questions about the limits on the freedom of contract, the ability of plaintiffs to forum-shop, and the capacity for parties to secure a favorable choice-of-law by filing the case first.

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