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The Forum Selection Clause: Arbitration and Enforcement of Arbitration Awards in Different Venues
The United States Supreme Court long ago held that personal rights can be waived, Ins. Corp. of Ireland v. Campagnie des Baixotes de Guinee, 456 U.S. 694 (1982), with the subsequent result that personal jurisdiction can be, and often is, the subject of negotiation. In particular, parties often bargain over clauses about where a dispute will be resolved. Such forum selection clauses can be either mandatory or permissive. A mandatory clause must clearly demonstrate the parties’ intent to make a particular jurisdiction exclusive. Clauses that state the parties “consent” or “submit” to a certain jurisdiction or that a court “shall have jurisdiction” are considered permissive because they are not necessarily exclusive to other forums.
A forum selection clause will be enforced unless the party opposing jurisdiction can meet the heavy burden of showing that its enforcement would be unreasonable, unfair or unjust. For example, the Eastern District of Virginia last year enforced an unusual and novel forum selection clause that required any lawsuits resulting from execution of a credit agreement to be commenced in the county where shipment of the goods originated. United States ex rel. Pro Build Co., LLC v. Scarborough, 2012 U.S. Dist. LEXIS 62427 (E.D. Va. Apr. 11, 2012). Despite these guiding principles, creative counsel continue to litigate the interpretation and application of forum and venue selection clauses.
Recently, the Western District of Virginia faced the issue of whether a federal district court can compel arbitration in its district when the challenged agreement stated that the arbitration should occur in another jurisdiction. It faced the additional questions of whether the complaint should be stayed or dismissed with or without prejudice if the case was in fact transferred. Sky Cable, LLC v. Coley, 2012 U.S. Dist. LEXIS 40119 (W.D. Va. Mar. 23, 2012).
In Sky Cable, plaintiff claimed negligence and breach of contract by the defendants in having stolen DirecTV programming from the plaintiff, underreporting subscriber counts, and failing to remit commissions to the plaintiff. The agreement between the parties contained an arbitration clause that required all disputes to be arbitrated in Los Angeles, California. The defendant moved to dismiss or in the alternative to transfer the case for binding arbitration to Los Angeles. Plaintiff responded that the court could compel arbitration in its own district and ignore the forum specified in the arbitration clause.
U.S. District Court Judge Michael F. Urbanski preliminarily addressed whether the defendant had waived its right to arbitration because it substantially utilized the litigation machinery so that to subsequently permit arbitration would prejudice plaintiff. Finding a strong federal public policy favoring arbitration, and that the circumstances giving rise to a waiver of arbitration are not lightly to be inferred, it held that no waiver had occurred in this case. Furthermore, it was clear to the court that there was no doubt regarding either the right to arbitrate or the validity of the scope of the issues to be resolved by arbitration as neither party had contended that the agreement was unconscionable or subject to revocation because it was unfair, unreasonable, or was affected by fraud or unequal bargaining power.
Focusing on the question at hand, the court reviewed three different approaches and the respective authorities in deciding whether a federal district court may compel arbitration in the circumstances presented.
One approach found that a court could compel arbitration in the district specified, even if it was different than the one in which the petition to compel arbitration was filed. A second approach permitted a district court to compel arbitration in its own district and to ignore the forum in the arbitration clause. And a third approach, followed by a majority of courts, holds that the district court lacks authority to compel arbitration in other districts, or even its own district, if another district has been specified.
The court noted that the Fourth Circuit had yet to decide the issue, but Judge Urbanski concluded that the Fourth Circuit had implied it would follow the majority, citing a number of authorities for his position. Accordingly, he held that venue in the Western District of Virginia was improper and enforced the arbitration clause. Given the option of dismissal without prejudice or transferring the case to another forum which would be more convenient for arbitration of the claims and the remainder of the case, he dismissed the complaint without prejudice so the parties could arbitrate in California and seek enforcement of any arbitration award in that forum.
The court did not discuss whether the forum selected for arbitration was mandatory or permissive or if enforcement was likewise mandatory or permissive in another jurisdiction. However, two months later another court did. Chandler v. Journey Educ. Mktg., Inc., 2012 U.S. Dist. LEXIS 67543 (S.D.W.V. May 15, 2012).
In Chandler, suit was initially filed in the Southern District of West Virginia but was stayed pending arbitration in Texas for arbitration as required by the agreement of the parties. The court was called upon to enforce the ruling of the arbitrator made in Texas. The losing party then challenged the request made to the Southern District of West Virginia to affirm the arbitration award, alleging that venue there was inappropriate and that a Texas court had exclusive jurisdiction. That effort was rejected because the forum selection clause provided that enforcement of any arbitration award “may be filed” in a Texas court, which was, in the court's view, a permissive, and not a mandatory, forum selection clause.
As recently as June 19, 2012, the Fourth Circuit Court of Appeals issued an unpublished opinion in which it addressed several forum selection clause issues, two of which are of particular interest. Monster Daddy, LLC v. Monster Cable Prods., Inc., 2012 U.S. App. LEXIS 12616 (4th Cir. June 19, 2012).The settlement agreement here included a forum selection clause stating that “any claim asserted in any legal proceeding by one party against the other shall be commenced and maintained in the United States District Court of South Carolina or a South Carolina state court of competent jurisdiction.” In addition, the prevailing party could recover “all such other damages, costs and expenses,” including “reasonable attorneys’ fees.”
Cable Products argued that Monster Daddy materially breached the agreement containing the forum selection clause and that it was not required to perform any of the obligations under the agreement, including that imposed by the forum selection clause. The Fourth Circuit found that adopting Cable Product’s position – if one party materially breached a settlement agreement, the other provisions of that settlement agreement were unenforceable – meant that parties could “readily shirk their contractual obligation to resolve disputes in a particular forum.” That, the Fourth Circuit concluded, would undermine the enforcement of a forum selection clause. The court also noted that the agreement was unambiguous, the forum selection clause was not dependent upon the performance of any other contractual provision of the agreement, and that any claim that the clause became unenforceable as a result of such a breach was inconsistent with the very purpose of the clause.
A second issue involved a provision in the agreement that provided for attorneys’ fees for the prevailing party. Cable Products had initially filed an action in California and that court awarded attorneys’ fees to Monster Cable, which successfully defended the action. The principal assertion here was that the award was not made to the prevailing party in a South Carolina action. The Fourth Circuit found that filing the action in California violated the forum selection clause; that the award was made to the “prevailing party” in that action; and that there was a nexus between the filing of the California case and the breach of the agreement that contained the forum selection clause. The court further concluded that the fees incurred were reasonable measures undertaken by Monster Cable to preserve its contractual right to litigate in the forum chosen by the parties.
Undoubtedly, there will be ongoing proceedings clarifying and affecting forum and venue selection clauses. Stay tuned!
Ira C. Wolpertis a Rockville attorney who specializes in business litigation and complex bankruptcy matters. He can be reached at firstname.lastname@example.org.