A Uniform System for the Enforceability of Forum Selection Clauses in Federal Courts

Article excerpt

I. INTRODUCTION: THE TALE OF STEWART, RICOH, AND CAROL

In the early 1980s, a successful and ambitious Alabama businessman named Walter H. Stewart purchased a failing local copying business. Through the Stewart Organization, a corporation he controlled, Stewart sought to steer this troubled business to the realm of profitability. To do so, he entered into a dealership contract with Ricoh Corporation, a national manufacturer of copy machines that conducted its operations in New York. Unfortunately, their relationship soured. Stewart sued Ricoh in an Alabama federal district court, basing jurisdiction on diversity of citizenship.1

Ricoh did not want to litigate in Alabama, and the original dealership contract seemed to provide a way out. That contract included a forum selection clause stating that any litigation arising out of the agreement had to be filed in a state or federal court located in Manhattan.2 Ricoh had two basic options for attempting to enforce this clause. It could move for the case to be transferred under the federal transfer statute3 to the federal district court in Manhattan.4 Alternatively, it could ask the court to enforce the clause by dismissing the Alabama suit.5 Ricoh chose to do both, but the district court, applying Alabama law to both motions, refused to enforce the clause.6 Ricoh preferred the application of federal law, which generally favored enforcing forum selection clauses,7 and it litigated the choiceof-law issue all the way to the U.S. Supreme Court. The Court sided with Ricoh, holding that the decision to transfer is governed by federal rather than state law.8 Thus, in the end, Ricoh from New York prevailed over Stewart from Alabama in selecting the forum for litigation.

Notably, the Court did not address the proper choice of law for motions to dismiss, because Ricoh abandoned that particular issue after losing at the district court level.9 The Eleventh Circuit, nonetheless, provided guidance on this issue, suggesting in broad dicta that federal law not only determines whether forum selection clauses should be enforced through a motion to transfer, but also a motion to dismiss.10 Thus, a defendant seeking to enforce a forum selection clause through a motion to dismiss in the Eleventh Circuit would likely benefit from the application of favorable federal law, rather than state law.

Yet if this exact situation were to recur in a state located in a different federal circuit, a federal court considering a forum selection clause's enforceability could reach a dramatically different result. Assume the following scenario. Carol from North Carolina enters into a contract with Ricoh from New York, and their contract contains a forum selection clause identical to the one in Stewart Organization, Inc. v. Ricoh Corp. The deal falls apart, and Carol files suit in federal district court in North Carolina.11 Ricoh again seeks to enforce the clause and bring the litigation home to New York. Nonetheless, Ricoh still faces the choice of bringing a motion to dismiss or a motion to transfer. If Ricoh files a motion to transfer, the North Carolina federal court would follow Stewart and apply federal law in determining whether the case should be transferred.12 As a practical matter, this would likely result in the clause being enforced through transfer to the New York federal court.13 However, if Ricoh files a motion to dismiss, the district court - lacking any guidance from Stewart on choice-of-law as to motions to dismiss - would likely apply state law in its determination as to dismissal.14 The district court would therefore apply North Carolina law,15 which disfavors forum selection clauses as a matter of public policy.16 The motion to dismiss would accordingly be denied, and the litigation would continue in North Carolina. Thus, whether Ricoh would be successful in moving litigation from North Carolina to New York would turn on the procedural device it employed to enforce the clause. …