Forum Selection Clauses: The De Facto Choice-of

Report
Forum Selection Clauses: The De
Facto Choice-of-Law Clauses
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The Effect of a Forum Selection Clause
• Where a contract contains an enforceable forum
selection clause, the choice of law clause will be
enforced as well
• Where a forum selection clause is held unenforceable,
the choice of law clause will also be unenforceable
• Where a contract contains a forum selection clause,
enforceability of the choice of law clause depends not
on where the lawsuit is filed, but on the enforceability
of the forum selection clause
• Where a contract contains only a choice of law clause,
the enforceability of that clause is dependent upon the
forum in which the action is brought
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A Few Statistics
• Forum selection clauses are upheld in more than 66% of
cases
• Choice of law provisions are upheld in 100% of cases where
a forum selection clause has been enforced, accordingly,
choice of law clauses paired with forum selection clauses
are upheld in 66% of cases
• Choice of law clauses that are not paired with a forum
selection clause are held unenforceable in 50% of cases
• Choice of law clauses are more than 16% more likely to be
upheld when paired with a forum selection clause
• In more than 80% of cases involving a choice of law issue,
forum law is applied
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Judicial Treatment of Forum Selection Clauses
• The Supreme Court has held that contractual forum selection clauses “are
prima facie valid” (M/S Bremen v. Zapata Off-Shore Co.)
• Under the Restatement (Second) §80, forum selection clauses are
enforceable unless unfair or unreasonable
• Courts have held forum selection clauses to be unreasonable in the
following three situations:
– 1. Where inclusion of the FSC was the result of fraud or overreaching;
– 2. If the party challenging enforcement of the FSC would effectively be
deprived of its day in court in the forum specified in the FSC; or
– 3. If enforcement would contravene a strong public policy of the forum
in which the lawsuit has been brought (the Bremen public policy
exception).
• The party challenging the enforcement of the forum selection clause bears
a heavy burden of proof (Id.)
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Application of the Bremen Public Policy Exception
• Application of the Bremen public policy exception has generally been
limited to two types of cases:
– 1. Cases where the public policy underlying the state law claim relates
to venue
• E.g., Jones v. GNC Franchising, Inc.: FSC held unenforceable as
contrary to CA’s public policy because of a CA statute, explicitly
making void any clause in a franchise agreement that limited
venue to a non-CA forum
– 2. Cases where the enforcement of the FSC would result in substantial
impairment of a party’s procedural rights
• E.g., Doe 1 v. AOL LLC: FSC held unenforceable because selected
state’s law did not allow consumer class actions, thereby stripping
consumers of important protections and remedies provided by CA
law and violating an anti-waiver provision in CA’s consumer
protection law
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The Standard Forum Selection Clause
Analysis
• In most cases, courts must analyze a FSC independent
of its effects
• So, when ruling on the enforceability of a FSC, courts
are typically not permitted to consider the
enforceability of a choice of law clause
• In support of this approach, courts have emphasized
that forum selection does not decide choice of law
• In addition, courts have repeatedly insisted that the
party arguing against enforcement of the FSC is free to
argue for the application of a foreign state’s law in the
selected forum
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The Flaw in the Standard FSC Analysis
Meras Engineering v. CH2O
• Facts
– WA employer entered into two employment agreements
with CA residents
– Both employment agreements contained a WA FSC, a WA
choice of law clause, and a non-compete covenant
– Both of the employment contracts were performed in CA
– Employees sued in CA state court for declaration of the
invalidity of the non-compete covenants
– Employer subsequently sued in WA state court to enforce
the non-compete covenants
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The Flaw in the Standard FSC Analysis
Meras Engineering v. CH2O
• WA Court: CA’s interest was not “materially greater” than WA’s and WA
choice of law clause was enforceable
• CA Court: (dismissed the case) Enforceability of the FSC must be
determined without consideration of its potential effect on choice of law
– CA and WA both apply Rest. 2d §187 to determine the enforceability
of a choice of law clause, so, forum selection would not decide choice
of law in this case
– The WA court was free to find that CA had a materially greater interest
than WA and accordingly, to apply the public policy exception to
invalidate the non-compete covenants as contrary to CA’s public policy
– Criticized Plaintiffs for conflating the forum selection and choice of law
analyses
• The Flaw: the CA court insists that Plaintiffs are free to argue for
application of CA in the WA court…but, the WA court already ruled that
WA law applied
– The court blatantly ignores the effect of the forum bias and bases its
decision on the theoretical possibility that the WA court could have
applied CA law
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Perry’s Illusive Categorical Distinction
• The court in Perry v. AT&T described the inclusion of a single non-compete
clause in an employment agreement as “categorically different” from a
contract created entirely for the purpose of evading CA law
• Perry separated cases into two different categories
– Category 1: FSC and choice of law provision may be analyzed together
• Includes cases in which selection of the forum will be
determinative of choice of law
• E.g., Perry, Doe 1, Jones
– Category 2: Analysis of the FSC must be entirely distinct from analysis
of choice of law
• Includes cases where forum selection is not determinative of
choice of law
• E.g., Meras Engineering
– Not a Distinction At All: As Meras Engineering illustrates, the cases
alleged to come within this second category are in fact, cases in which
forum selection is determinative of choice of law and thus, are
indistinguishable from the cases in category 1 on those grounds
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Which Came First, The Chicken or the Egg?
The Wisconsin Approach
• Beilfuss v. Huffy Corp.
– OH corporation and WI resident enter into employment agreement
containing OH FSC, OH choice of law clause, and a non-compete
covenant
– Employee sued in WI Circuit Court; OH corp. sued in OH state court
• Rule: “[T]he validity of the choice of law provision is a precondition to
determining the enforceability of the forum selection provision.”
• Reasoning:
– Enforcement of choice of law provision is contrary to WI’s public policy
re non-compete covenants
– It is logical to have a court familiar with WI statutory and common law
covering non-compete covenants to apply the law rather than a court
in another forum, which is unfamiliar with WI law or public policy
supporting the law
– So, enforcement of the FSC is unreasonable
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The Superiority of the WI Approach
• The assumption that forum selection does not decide choice of law
is plainly false
– Perhaps separate analysis made sense under the territorial approach,
but under the modern approach this assumption is unsupported
• FSCs and choice of law are inextricably intertwined
– The WI approach recognizes this, and treats FSCs accordingly
– The WI approach extinguishes the illusory distinction proposed in
Perry
• Mere convenience is insufficient
– The fact that consideration of a FSC and a choice of law clause
together might create more work for the courts does not justify the
requirement that FSCs be considered independent of their effects
• The court in which the lawsuit is brought may in a better position to
decide the enforceability of a choice of law clause
• FSCs are, in reality, de facto choice of law clauses
• Thus, courts should adopt the Beilfuss approach and treat the
enforceability of a choice of law provision as a precondition to
determining the enforceability of a FSC
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