Tuesday, December 24, 2013

Supreme Court Finds Forum Selection Clauses Presumptively Valid

For the second straight year, the Supreme Court has issued an opinion which impacts procedural issues surrounding many non-compete disputes.

Last year, the Court held that when an employment contract contains an arbitration clause, an arbitrator - not a court - must determine the enforceability of a restrictive covenant. This year, the Court addressed an issue which seems more and more pervasive in covenant fights: the enforceability of forum selection clauses. These procedural disputes are time-consuming, expensive, and totally ancillary to the merits.

Venue provisions seem to be part and parcel of any employment agreement nowadays, with those clauses specifying what law the parties agree to apply and where any dispute should be heard. Although it is not uncommon to see venue provisions as merely optional or permissive, it is far more frequent in my opinion to see mandatory clauses that specify the employer's home state as the exclusive place for dispute resolution.

The problem concerning enforceability of these clauses generally arises when an employee lives and works out of state. Often times, the employee - anticipating a covenant lawsuit - will file preemptively in his or her home state to establish a venue different than that specified in the contract. Just as frequently, the employee's first response in a covenant suit is to try to dismiss or transfer the case on venue grounds to his or her home district.

Is this permissible? The Court in Atlantic Marine Constr. Co. v. U.S. Dist. Ct. makes it much more difficult for the employee to raise this defense.

The Court in Atlantic Marine held that a district court should enforce the forum selection clause and transfer the case to a different federal court (the one in the pre-determined venue) unless extraordinary circumstances "unrelated to the convenience of the parties" work against a transfer. Effectively, the forum selection clause has controlling weight in the case, and a district court judge should transfer the case unless non-parties would be inconvenienced.

For an employee, the only practical way to prevail in this type of forum fight is to introduce by way of affidavit specific testimony showing that nearly all of the relevant witnesses are located out of state. This would cause a court to consider whether maintaining the suit in the chosen state would work a hardship on third-parties and lead to problems with subpoena compliance. Even that may not be enough, since presumably the employer will introduce counter-testimony showing which witnesses reside in the contractually agreed-to state. The availability of video testimony or use of depositions at trial further work against the employee. That said, the employee's showing must be compelling, detailed, and substantial if he or she is to have any shot at all.

It is important to remember that when a venue fight like this arises it usually takes place in federal court. If the employee files a preemptive suit in another state, it is a virtual certainty there will be complete diversity between the parties so the suit will end up somehow in federal court (either on its own or through the process of removing it out of the state court into the federal court). When seeking to enforce a forum selection clause, the employer is going to move to have the case transferred to a different federal court or dismissed so it can refile in the appropriate state court. However, the Court's opinion indicates the same test concerning enforceability of the forum selection clause will apply regardless of whether the motion is for transfer or dismissal.

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