Choosing Legal Regimes
When states adopt differing legal rules, opportunities are created for private parties to choose their preferred set of rules to govern their activities. With increasing frequency, interstate and internationally mobile parties strategically locate their assets and activities and/or place clauses into their contracts designed to help them avoid the courts and law of undesired jurisdictions. In some cases, parties are also able to affirmatively opt into preferred legal regimes. In the United States, for example, incorporating businesses can choose the law that will apply to the internal affairs of the corporation simply by choosing the state of incorporation. Ship owners can choose much of the law that applies to onboard activities by choosing the nation in which to register the ship (known as “the law of the flag”). And, within the U.S., credit card companies are permitted to charge any interest rates or fees that are permissible in the State where the company locates its lending operations.
In contracts, companies regularly incorporate clauses specifying the law that will govern the transaction and/or the forum (court or arbitration) where any future disputes between the parties will be resolved. Party choice helps provide the parties with predictability and notice regarding the rules that they are expected to follow, and it allows a company operating in many places to adopt a single set of company policies (which inevitably take into account governing laws). Choice also enables parties to choose the legal regime that best suits the particular needs of the transaction. Choice reduces the costs of outdated and poorly crafted rules by making it easy for parties to avoid them. Finally, choice can generate competition among governments to generate more efficient laws in order to attract transactional and litigation business.
Party choice can prove problematic, however. A knowledgeable party might choose a law or forum that benefits it at the expense of a less knowledgeable party. In addition, state efforts to regulate harmful conduct are thwarted when parties can easily circumvent those rules. Moreover, jurisdictional competition can lead to states adopting rules that attract transactional or litigation business at the expense of others, including less mobile state residents.
This chapter considers the extent to which party choice is permitted, and provokes thought regarding the boundaries of private choices. Section A explores contractual choice of law, Section B treats choice-of-court clauses, and Section C covers the legal treatment of arbitration clauses.
A. Contractual Choice of Law
Recall from Chapter 2, supra page 45, that the First Restatement made no provision for the enforcement of choice-of-law clauses, and Beale (as well as some courts) was hostile to them on the ground that they created “private legislation.” In contrast, the Second Restatement explicitly endorses party autonomy to choose the applicable law in a wide range of circumstances. Its treatment is enormously popular among courts—including (as the first case below demonstrates) courts that do not otherwise follow the Second Restatement. The Contracts portion of the Second Restatement begins with section 186, which states:
186. Applicable Law
Issues in contract are determined by the law chosen by the parties in accordance with the rule of §187 and otherwise by the law selected in accordance with the rule of §188.
If the parties have chosen a governing law in their agreement, that choice is given significant weight:
187. Law of the State Chosen by the Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of §188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
Note the strong presumption in favor of enforcing the parties’ choice of governing law. Why are parties permitted, under subsection (2)(b), to violate the “fundamental policy” of a state that has half, but not a “materially greater,” interest in the issue at stake? If the issue is one that the parties could not have resolved by an explicit provision of their contract, why should a state with a “materially greater” interest in the case not get to apply its law, in the face of a contrary contractual provision, simply because the policy is merely important, and not fundamental? And as long as the forum is willing to allow parties to choose law other than its own, even when it has policies on point, why is the choice limited to the law of a state with “substantial connection”?
Nedlloyd Lines B.V. v. Superior Court of San Mateo County Seawinds Ltd.
834 P.2d 1148, 3 Cal. 4th 459, 11 Cal. Rptr. 2d 330 (1992)
We granted review to consider the effect of a choice-of-law clause in a contract between commercial entities to finance and operate an international shipping business. In our order granting review, we limited our consideration to the question whether and to what extent the law of Hong Kong, chosen in the parties’ agreement, should be applied in ruling on defendant’s demurrer to plaintiff’s complaint.
We conclude the choice-of-law clause, which requires that the contract be “governed by” the law of Hong Kong, a jurisdiction having a substantial connection with the parties, is fully enforceable and applicable to claims for breach of the implied covenant of good faith and fair dealing and for breach of fiduciary duties allegedly arising out of the contract. Our conclusion rests on the choice-of-law rules derived from California decisions and the Restatement Second of Conflict of Laws, which reflect strong policy considerations favoring the enforcement of freely negotiated choice-of-law clauses. Based on our conclusion, we will reverse the judgments of the Court of Appeal and remand for further proceedings.
Plaintiff and real party in interest Seawinds Limited (Seawinds) is a shipping company, currently undergoing reorganization under chapter 11 of the United States Bankruptcy Code, whose business consists of the operation of three container ships. Seawinds was incorporated in Hong Kong in late 1982 and has its principal place of business in Redwood City, California. Defendants and petitioners Nedlloyd Lines B.V., Royal Nedlloyd Group N.V., and KNSM Lines B.V. (collectively referred to as Nedlloyd) are interrelated shipping companies incorporated in the Netherlands with their principal place of business in Rotterdam.
In March 1983, Nedlloyd and other parties (including an Oregon corporation, a Hong Kong corporation, a British corporation, three individual residents of California, and a resident of Singapore) entered into a contract to purchase shares of Seawinds’ stock. The contract, which was entitled “Shareholders’ Agreement in Respect of Seawinds Limited,” stated that its purpose was “to establish [Seawinds] as a joint venture company to carry on a transportation operation.” The agreement also provided that Seawinds would carry on the business of the transportation company and that the parties to the agreement would use “means reasonably available” to ensure the business was a success.
The shareholders’ agreement between the parties contained the following choice-of-law and forum selection provision: “This agreement shall be governed by and construed in accordance with Hong Kong law and each party hereby irrevocably submits to the nonexclusive jurisdiction and service of process of the Hong Kong courts.”
In January 1989, Seawinds sued Nedlloyd, alleging in essence that Nedlloyd breached express and implied obligations under the shareholders’ agreement by: “(1) engaging in activities that led to the cancellation of charter hires that were essential to Seawinds’ business; (2) attempting to interfere with a proposed joint service agreement between Seawinds and the East Asiatic Company, and delaying its implementation; (3) making and then reneging on commitments to contribute additional capital, thereby dissuading others from dealing with Seawinds; and (4) making false and disparaging statements about Seawinds’ business operations and financial condition.” Seawinds’ original and first amended complaint included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (in both contract and tort), and breach of fiduciary duty. This matter comes before us after trial court rulings on demurrers to Seawinds’ complaints.
Nedlloyd demurred to Seawinds’ original complaint on the grounds that it failed to state causes of action for breach of the implied covenant of good faith and fair dealing (either in contract or in tort) and breach of fiduciary duty. In support of its demurrer, Nedlloyd contended the shareholders’ agreement required the application of Hong Kong law to Seawinds’ claims. In opposition to the demurrer, Seawinds argued that California law should be applied to its causes of action.…
We have not previously considered the enforceability of a contractual choice-of-law provision. We have, however, addressed the closely related issue of the enforceability of a contractual choice-of-forum provision, and we have made clear that, “No satisfying reason of public policy has been suggested why enforcement should be denied a forum selection clause appearing in a contract entered into freely and voluntarily by parties who have negotiated at arm’s length.” Smith, Valentino & Smith, Inc. v. Superior Court (1976) 551 P.2d 1206. The forum selection provision in Smith was contained within a choice-of-law clause, and we observed that, “Such choice of law provisions are usually respected by California courts.” We noted this result was consistent with the modern approach of section 187 of the Restatement Second of Conflict of Laws (Restatement). Prior Court of Appeal decisions, although not always explicitly referring to the Restatement, also overwhelmingly reflect the modern, mainstream approach adopted in the Restatement.1 We affirm this approach. In determining the enforceability of the arm’s-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement section 187, which reflect a strong policy favoring enforcement of such provisions.
…[T]he proper approach under Restatement section 187, subdivision (2) is for the court first to determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties’ choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties’ choice of law.4 If, however, either test is met, the court must next determine whether the chosen state’s law is contrary to a fundamental policy of California.5 If there is no such conflict, the court shall enforce the parties’ choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a “materially greater interest than the chosen state in the determination of the particular issue.…” (Rest., §187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state’s fundamental policy.6 We now apply the Restatement test to the facts of this case.
As to the first required determination, Hong Kong—“the chosen state”—clearly has a “substantial relationship to the parties.” (Rest. §187, subd. (2)(a).) The shareholders’ agreement, which is incorporated by reference in Seawinds’ first amended complaint, shows that Seawinds is incorporated under the laws of Hong Kong and has a registered office there. The same is true of one of the shareholder parties to the agreement—Red Coconut Trading Co. The incorporation of these parties in Hong Kong provides the required “substantial relationship” (Id., com. f [substantial relationship present when “one of the parties is domiciled” in the chosen state]).
Moreover, the presence of two Hong Kong corporations as parties also provides a “reasonable basis” for a contractual provision requiring application of Hong Kong law. “If one of the parties resides in the chosen state, the parties have a reasonable basis for their choice.” The reasonableness of choosing Hong Kong becomes manifest when the nature of the agreement before us is considered. A state of incorporation is certainly at least one government entity with a keen and intimate interest in internal corporate affairs, including the purchase and sale of its shares, as well as corporate management and operations. (See Corp. Code, §102 [applying California’s general corporation law to domestic corporations].)
We next consider whether application of the law chosen by the parties would be contrary to “a fundamental policy” of California. We perceive no fundamental policy of California requiring the application of California law to Seawinds’ claims based on the implied covenant of good faith and fair dealing. The covenant is not a government regulatory policy designed to restrict freedom of contract, but an implied promise inserted in an agreement to carry out the presumed intentions of contracting parties.
Seawinds directs us to no authority exalting the implied covenant of good faith and fair dealing over the express covenant of these parties that Hong Kong law shall govern their agreement. We have located none. Because Seawinds has identified no fundamental policy of our state at issue in its essentially contractual dispute with Nedlloyd, the second exception to the rule of section 187 of the Restatement does not apply.
Seawinds contends that, whether or not the choice-of-law clause governs Seawinds’ implied covenant claim, Seawinds’ fiduciary duty claim is somehow independent of the shareholders’ agreement and therefore outside the intended scope of the clause. Seawinds thus concludes California law must be applied to this claim. We disagree.
When two sophisticated, commercial entities agree to a choice-of-law clause like the one in this case, the most reasonable interpretation of their actions is that they intended for the clause to apply to all causes of action arising from or related to their contract. Initially, such an interpretation is supported by the plain meaning of the language used by the parties. The choice-of-law clause in the shareholders’ agreement provides: “This agreement shall be governed by and construed in accordance with Hong Kong law and each party hereby irrevocably submits to the non-exclusive jurisdiction and service of process of the Hong Kong courts.” (Italics added.)7
The phrase “governed by” is a broad one signifying a relationship of absolute direction, control, and restraint. Thus, the clause reflects the parties’ clear contemplation that “the agreement” is to be completely and absolutely controlled by Hong Kong law. No exceptions are provided. In the context of this case, the agreement to be controlled by Hong Kong law is a shareholders’ agreement that expressly provides for the purchase of shares in Seawinds by Nedlloyd and creates the relationship between shareholder and corporation that gives rise to Seawinds’ cause of action. Nedlloyd’s fiduciary duties, if any, arise from—and can exist only because of—the shareholders’ agreement pursuant to which Seawinds’ stock was purchased by Nedlloyd.
In order to control completely the agreement of the parties, Hong Kong law must also govern the stock purchase portion of that agreement and the legal duties created by or emanating from the stock purchase, including any fiduciary duties. If Hong Kong law were not applied to these duties, it would effectively control only part of the agreement, not all of it. Such an interpretation would be inconsistent with the unrestricted character of the choice-of-law clause.
Our conclusion in this regard comports with common sense and commercial reality. When a rational businessperson enters into an agreement establishing a transaction or relationship and provides that disputes arising from the agreement shall be governed by the law of an identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship. We seriously doubt that any rational businessperson, attempting to provide by contract for an efficient and businesslike resolution of possible future disputes, would intend that the laws of multiple jurisdictions would apply to a single controversy having its origin in a single, contract-based relationship. Nor do we believe such a person would reasonably desire a protracted litigation battle concerning only the threshold question of what law was to be applied to which asserted claims or issues. Indeed, the manifest purpose of a choice-of-law clause is precisely to avoid such a battle.
Seawinds’ view of the problem—which would require extensive litigation of the parties’ supposed intentions regarding the choice-of-law clause to the end that the laws of multiple states might be applied to their dispute—is more likely the product of postdispute litigation strategy, not predispute contractual intent. If commercially sophisticated parties (such as those now before us) truly intend the result advocated by Seawinds, they should, in fairness to one another and in the interest of economy in dispute resolution, negotiate and obtain the assent of their fellow parties to explicit contract language specifying what jurisdiction’s law applies to what issues.
For the reasons stated above, we hold a valid choice-of-law clause, which provides that a specified body of law “governs” the “agreement” between the parties, encompasses all causes of action arising from or related to that agreement, regardless of how they are characterized, including tortious breaches of duties emanating from the agreement or the legal relationships it creates.
Applying the test we have adopted we find no reason not to apply the parties’ choice of law to Seawinds’ cause of action for breach of fiduciary duty. As we have explained, Hong Kong, the chosen state, has a “substantial relationship to the parties” because two of those parties are incorporated there. Moreover, their incorporation in that state affords a “reasonable basis” for choosing Hong Kong law.
Seawinds identifies no fundamental public policy of this state that would be offended by application of Hong Kong law to a claim by a Hong Kong corporation against its allegedly controlling shareholder. We are directed to no California statute or constitutional provision designed to preclude freedom of contract in this context. Indeed, even in the absence of a choice-of-law clause, Hong Kong’s overriding interest in the internal affairs of corporations domiciled there would in most cases require application of its law. See Rest. §306 [obligations owed by majority shareholder to corporation determined by the law of the state of incorporation except in unusual circumstances not present here].
For strategic reasons related to its current dispute with Nedlloyd, Seawinds seeks to create a fiduciary relationship by disregarding the law Seawinds voluntarily agreed to accept as binding—the law of a state that also happens to be Seawinds’ own corporate domicile. To allow Seawinds to use California law in this fashion would further no ascertainable fundamental policy of California; indeed, it would undermine California’s policy of respecting the choices made by parties to voluntarily negotiated agreements.
LUCAS, C.J., and ARABIAN and GEORGE, JJ., concur.
PANELLI, J., concurring and dissenting.
I generally concur in the majority opinion’s explanation of the standards controlling when a contractual choice-of-law provision will be honored by the courts of this state and with the majority’s application of these standards to Seawinds’ cause of action for breach of the covenant of good faith and fair dealing. I write separately to express my disagreement with the majority’s conclusion, based on the record before us, that the choice-of-law clause in this case governs Seawinds’ cause of action for breach of fiduciary duty. In my view, the majority’s analysis of the scope of the choice-of-law clause is unsound.
The choice-of-law clause in this case reads in pertinent part: “This agreement shall be governed by and construed in accordance with Hong Kong law.…”1 The majority determines that the scope of the choice-of-law clause, which was incorporated into the first amended complaint by attachment, extends to related, noncontractual causes of action, such as Seawinds’ breach of fiduciary duty claim. In so doing, the majority opinion adopts the rule that “[w]hen two sophisticated, commercial entities agree to a choice-of-law clause like the one in this case, the most reasonable interpretation of their actions is that they intended for the clause to apply to all causes of action arising from or related to their contract.” Without citing any authority, the majority opinion announces a binding rule of contractual interpretation, based solely upon “common sense and commercial reality.”
… In this case, the language of the incorporated contract easily can be read to apply only to contractual causes of action: “This agreement shall be governed … by Hong Kong law.”
In my view, the majority’s mistaken construction of the choice-of-law clause is clear when the language used in the present contract is compared, as Nedlloyd urges us to do, with the language construed by this court in Smith, Valentino & Smith, Inc. v. Superior Court (1976) 551 P.2d 1206. In that case, this court determined that claims for unfair competition and intentional interference with advantageous business relationships were governed by a choice-of-forum clause as “actions or proceedings instituted by…[Smith] under this Agreement with respect to any matters arising under or growing out of this agreement.…” In contrast to the language used by Nedlloyd and Seawinds in their agreement, the contractual language, “arising under or growing out of this agreement,” which was used in Smith, explicitly shows an intent to embrace related noncontractual claims, as well as contractual claims. Although similar language was readily available to them, the sophisticated parties in the present case did not draft their choice-of-law clause to clearly encompass related noncontractual causes of action.2…
Finally, the majority’s rule effectively subordinates the intent of the contracting parties to the need for predictability in commercial transactions. The majority strikes this balance despite the fact that our Legislature has commanded otherwise. Under California law, “[a] contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Civ. Code, §1636.) In contrast to this legislative command, the majority conclusively presumes that choice-of-law clauses entered into between or among commercial entities apply to related noncontractual causes of action regardless of whether the intent of the parties or the contract language (as in this case) shows otherwise. I believe that the departure by the majority from established California law is unwarranted and is unnecessary to further the goals of predictability in the enforcement of contracts and protection of the justified expectations of contracting parties. These goals can be adequately protected within the framework of the current law governing contractual interpretation by enforcing choice-of-law clauses in a manner consistent with the language of the contract and the intent of the parties.
I am keenly aware of the need for predictability in the enforcement of commercial contracts. Nevertheless, although courts and litigants may wish the law were otherwise, not every issue can be conclusively determined at the pleading stage. On the present record, the scope of the choice-of-law clause must be construed in favor of Seawinds.
Questions and Comments
(1) Choice-of-law clauses are routinely incorporated into large commercial contracts and are also increasingly common in smaller-scale consumer contracts. Sometimes they are included because the law of one specific state is thought particularly desirable by one or both parties. But surprisingly often, the parties do not even bother to research the chosen law before they include a clause selecting it. This suggests that the parties may be as attracted by the avoidance of uncertainty and litigation expenses over choice-of-law matters, per se, as by the perceived benefits of any particular law. Note that the beneficiary of the increased certainty might well be the defendant, for it is typically the plaintiff who benefits from the chance to forum shop for a more desirable substantive law.
(2) Despite their obvious advantages in reducing uncertainty, choice-of-law clauses can be, themselves, a source of litigation, as the Nedlloyd case suggests. Under the Restatement Second test, there are two main sources of controversy, both illustrated by Nedlloyd.
At the outset, courts must determine whether (1) or (2) is the applicable subsection; the former is unqualifiedly permissive, while the latter imposes conditions on enforcement of the clause. Subsection (1) applies to issues on which the parties had the freedom to contract explicitly for the substantive terms and simply chose to do so in a shorthand manner, namely by selecting a law that so provides. Many rules of contract law are default rules, which the parties can override by specific contract terms; as to these, they may select any state’s law they choose, even if it has no connection to the controversy. Subsection (2), in contrast, deals with what are sometimes called “mandatory” rules, which the parties could not defeat by more detailed drafting of the substantive terms of the contract; this category would include, for example, rules prohibiting punitive damages or outlawing certain kinds of disclaimers. As to these, a reasonable basis for selecting the chosen state must be shown, and the chosen law must not offend a “materially greater interest” of the state whose law must otherwise apply. These requirements are vague, which compromises the certainty advantage to choosing law. Note also that application of section 187(2) requires a prior determination of the law that would otherwise apply, which seems to be precisely the issue that a choice-of-law clause should help avoid.
(3) The second potential controversy under section 187 is determining the scope of the choice-of-law clause. As Nedlloyd suggests, the parties’ dispute may include claims that are not, strictly speaking, contractual; in addition to the sort of claim at issue there (breach of fiduciary duty), other examples include claims based on fraud or misrepresentation. Does the selected law govern these issues as well? The Nedlloyd court states (in footnote 7) that the scope of the choice-of-law clause must be determined by consulting the chosen state’s law. Given that section 187(3) states that the reference is to the chosen state’s local law, and not its choice-of-law rules, this result is not compelled. What reasons could be given for the court’s result? The court also decided that under California law the clause should be read broadly, to include a claim for breach of fiduciary duty; some courts have concluded otherwise. See, e.g., Klock v. Lehman Bros. Kuhn Loeb, Inc., 584 F. Supp. 210 (S.D.N.Y. 1984); Carlock v. Pillsbury Co., 719 F. Supp. 791 (D. Minn. 1989).
(4) Another issue concerning the scope of choice-of-law clauses is whether selection of a state’s laws requires application of that state’s “procedural” rules, including statutes of limitations. Should the fact that such issues are ordinarily resolved under forum law mean that the choice-of-law clause has no relevance to resolving them? Note that the parties might, if they so chose, specify in the contract a time period for bringing suit; does this cast doubt on the “procedural” characterization? Consider also whether forum law or the law specified in the contract should be used to determine whether a prevailing party can recover attorney fees. See Midwest Medical Supply Co. v. Wingert, 317 S.W.3d 530 (Ct. App. Tex. 2010) (recovery of attorneys’ fees deemed substantive and therefore determined according to the law chosen by the parties).
(5) A few states have adopted legislation providing for virtually automatic enforcement of clauses choosing that state’s law. For example, New York law provides:
5-1401. Choice of Law
1. The parties to any contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars, including a transaction otherwise covered by subsection one of section 1-105 of the uniform commercial code, may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state. This section shall not apply to any contract, agreement or undertaking (a) for labor or personal services, (b) relating to any transaction for personal, family or household services, or (c) to the extent provided to the contrary in subsection two of section 1-105 of the uniform commercial code.
2. Nothing contained in this section shall be construed to limit or deny the enforcement of any provision respecting choice of law in any other contract, agreement or undertaking.
(Section 5-1402 of the General Obligations Law, analogously, provides for enforcement of clauses choosing New York as the forum). California, Delaware, Florida, Illinois, and Texas have all passed similar statutes, though the minimum transaction dollar amount necessary to trigger automatic enforcement varies from $ 100,000 to $1,000,000. Does the fact that each of these statutes provides for enforcement of clauses choosing forum law, but not clauses choosing the law of other states, discriminate against sister states’ laws? Is there any good reason for distinguishing between the two? Consult Hughes v. Fetter, page 343 supra.
Banek, Inc. v. Yogurt Ventures U.S.A., Inc.
6 F.3d 357 (6th Cir. 1993)
GUY, Circuit Judge.
In this interlocutory appeal, plaintiff, Banek, Inc., appeals the district court’s ruling that a choice of law provision contained in the parties’ franchise agreement was valid and enforceable. Upon review of the record and consideration of the arguments of the parties, we conclude that the district court’s decision was correct and affirm.
Plaintiff, Banek, Inc., owned by Mr. and Mrs. Banek, entered into negotiations with defendant Yogurt Ventures U.S.A., Inc., a Georgia corporation owned by defendants John and Richard Stern, for the purchase of a Freshens Yogurt franchise to be located in Monroe, Michigan. After negotiating several changes in the agreement, the parties signed a “Franchise and Development Agreement” in February 1990. Sales at the Monroe location were not as expected, and Banek closed its Freshens franchise in March 1992. In October 1991, prior to shutting down, Banek filed suit in state court against Yogurt Ventures. The suit alleged breach of contract, various violations of the Michigan Franchise Investment Law (MFIL), violations of the Federal Trade Commission Franchise Rules, common law fraud and misrepresentation, and negligence. In May 1992, after closing the Monroe site, Banek filed a separate action against John and Richard Stern. These two cases were then consolidated. Following removal to federal court based on diversity jurisdiction, defendants moved for dismissal of all counts on various theories.
The district court granted defendants’ motion in part and denied it in part. The court ruled that the choice of law provision in the parties’ agreement, providing that Georgia law is to govern the rights and obligations of the parties, was valid and enforceable under Michigan law and thus dismissed plaintiff’s claim alleging violations of the MFIL.… Only the ruling concerning the choice of law provision is before this court on interlocutory appeal.
The franchise agreement between these parties provides:
This Agreement was made and entered into in the State [of] Georgia and all rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Georgia.
We see the issue in this appeal as involving three separate, sequential questions. First, is this a valid choice of law clause or is it a waiver of rights which is prohibited under the MFIL? Second, if the clause is valid, is this choice of law provision enforceable under Michigan choice of law rules? Third, if this provision is valid and enforceable, does Georgia law govern all claims between the parties or only contract claims?
We begin with answering the first question in the affirmative. Plaintiff … argue[s] that the choice of law provision in the agreement operates as a waiver of the rights and protections under the MFIL and thus is void under Mich. Comp. Laws Ann. §445.1527. That section provides:
Each of the following provisions is void and unenforceable if contained in any documents relating to a franchise:
…(b) A requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this act. This shall not preclude a franchisee, after entering into a franchise agreement, from settling any and all claims.
…(f) A provision requiring that arbitration or litigation be conducted outside this state. This shall not preclude the franchisee from entering into an agreement, at the time of arbitration, to conduct arbitration at a location outside this state.
Plaintiff argues that the choice of law provision making Georgia law applicable acts as a waiver of “rights and protections” provided under the MFIL. We disagree.
The Michigan legislature was specific enough to include forum selection provisions in the list of void provisions, but did not specify choice of law provisions. Seemingly, the Michigan legislature understood that the burdens of being forced to arbitrate a claim in a foreign forum are significant, as subsection (f) makes arbitration or litigation of forum selection clauses void. However, litigating in Michigan does not require that Michigan law must govern the dispute. The statute does not expressly void choice of law provisions, and we decline to imply such a prohibition. The Michigan legislature may have purposefully omitted choice of law provisions from those clauses prohibited because it may have realized that other states’ laws might provide more protection to franchisees; thus, if a franchisee and franchisor want to choose a different state’s law to govern any disputes, the parties may so contract. Providing that waivers and releases are void is not equivalent to voiding choice of law provisions. See Tele-Save Merchandising Co. v. Consumers Distrib. Co., 814 F.2d 1120, 1122-1123 (6th Cir. 1987) (Ohio law voiding any waiver of the Ohio Business Opportunity Plans Act did not void choice of law provision).
The cases cited by plaintiff … are inapposite. As noted in Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128, 134 (7th Cir. 1990), “the strength of nonwaiver provisions among states varies.” In Wright-Moore, the Indiana statute made it unlawful to enter into an agreement “limiting litigation brought for breach of the agreement in any manner whatsoever,” Ind. Code §23-2-2.7-1(10), and thus the court held that the choice of law provision in the contract at issue was void. Other states expressly include choice of law provisions in the list of void and unenforceable provisions. See, e.g., Minn. Stat. §80C.21. The Michigan statute is not so strongly worded, perhaps for the reason expressed above. Alternatively or additionally, the Michigan legislature may have recognized that requiring all franchises located in Michigan be governed by Michigan law, regardless of any agreement to the contrary, would make Michigan a less desirable target state for franchisors, making franchises in Michigan more expensive to own. This would be largely because of a national franchisor’s need for uniformity in its business affairs. Having to comply with differing laws for each of the states in which it does business increases expenses. In any event, Michigan has not indicated a desire to bar choice of law provisions either expressly or implicitly.
That brings us to the second question: Should the valid choice of law provision be enforced under Michigan’s choice of law rules? It is a well-accepted principle that a federal court in a diversity case must apply the conflict of law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 490 (1941). Therefore, this court must look to Michigan conflict of law principles to determine whether Michigan or Georgia law governs this dispute.
Michigan has adopted the approach articulated in Restatement (Second) of Conflict of Laws §187 (1971). Under section 187, a contractual choice of law provision will govern unless either:
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of §188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
In the present case, the parties do not dispute that there is a substantial relationship with the State of Georgia. Assuming without deciding that under section 188 Michigan law would apply, plaintiff argues that to enforce the choice of law provision and apply Georgia law would violate Michigan’s public policy, as expressed in the MFIL, to protect franchisees from over-reaching by franchisors and from the superior bargaining power franchisors possess. Initially, we note that this is not a case of a take-it-or-leave-it adhesion contract. Banek successfully negotiated multiple changes in Yogurt Ventures’ standard franchise agreement, dispelling the claim of unfair bargaining power.2 As we have stated previously, we “move cautiously when asked to hold contract clauses unenforceable on public policy grounds.…” Moses v. Business Card Express, Inc., 929 F.2d 1131, 1139 (6th Cir.) (1991). While we agree with plaintiff that the comprehensive and paternalistic franchise investment law represents Michigan public policy,3 that does not end the inquiry. The more central question in this case is whether the parties have selected, through their choice of law provision, a jurisdiction in which there is a substantial erosion of the quality of protection that the MFIL would otherwise provide. A court may not assume that, merely because Michigan has adopted a franchise statute, the application of Georgia’s laws would be contrary to Michigan’s public policy. Tele-Save, 814 F.2d at 1123.
“In order for the chosen state’s law to violate the fundamental policy of [the forum state], it must be shown that there are significant differences in the application of the law of the two states.” Id. Banek has failed to show any specific significant differences between the application of Georgia law and Michigan law to their claims. [The court concluded that the rights, obligations, and remedies provided under Georgia statute and common law were all comparable to Michigan law, or at least provided adequate redress].…
[P]laintiff has failed to demonstrate how application of Georgia law would violate a specific fundamental policy of Michigan.…
Finally, because the choice of law provision in the contract is valid and enforceable, we must determine its scope. Plaintiff contends that Georgia law should only govern contract claims, while defendant argues that all claims arising out of the parties’ franchise dealings should be governed under Georgia law. This court faced a similar question in Moses where the choice of law provision read: “This Franchise and License Agreement and the construction thereof shall be governed by the laws of the state of Michigan.” We held that the clause clearly referred to more than just the construction of the agreement and extended to plaintiff’s claims of fraud and misrepresentation. In the present case, the contract provides “this Agreement was made and entered into in the State [of] Georgia and all rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Georgia.” As in Moses, we find that the choice of law provision is sufficiently broad so as to cover plaintiff’s claims of fraud and misrepresentation. Had these claims only been tangentially related to the franchise relationship, we would be much more inclined to find the choice of law provision not applicable. The claims of fraud and misrepresentation that plaintiff has asserted here are directly related to the franchise agreement.
The order of the district court is affirmed.
Questions and Comments
(1) Why does the Banek court ask whether the choice-of-law clause is valid under the Michigan franchise law before performing a choice-of-law analysis? Why does it assume the Michigan law governs this issue? Would the Michigan franchise law apply to a franchise agreement in Georgia between Georgia domiciliaries? What is the difference between the court’s first and second “sequential questions”?
(2) Would the Banek court have enforced the choice-of-law clause if the parties had not negotiated the contract and changed some of its terms? If the Michigan franchise law expressly prohibited choice-of-law clauses? If there were “significant differences” between the Michigan and Georgia franchise regimes? Which of these factors is most important under section 187(2)(b)? More generally, how do courts determine when a state policy is “fundamental” within the meaning of section 187(2)(b)? Is this the same inquiry as the traditional public policy exception to choice of law?
(3) What are the extraterritorial limits on a state’s application of its franchise laws? In Instructional Systems, Inc. v. Computer Curriculum Corp., 614 A.2d 124 (N.J. 1992), a New Jersey firm (ISI) was the exclusive distributor in 11 Northeast states from 1974 to 1989 of an educational computer product made by a California firm (CCC). When their contract, which contained a California choice-of-law clause, expired in 1989, CCC offered ICI a new contract that reduced its marketing territory to three states. ISI sued CCC in New Jersey, alleging that the new contract imposed unreasonable performance standards in violation of the New Jersey Franchise Act. The court held that the New Jersey Franchise Act governed not only distribution activities in New Jersey, but also in other states included in the original contract. The court reasoned: “To the extent that it is applicable, the New Jersey Act regulates instate conduct that has out-of-state effects.…[T]he State regulation is applicable … to specific transactions affecting New Jersey, i.e., franchises that have a “place of business” in New Jersey.” Id. at 368-389. The Third Circuit subsequently ruled that this holding did not violate constitutional limitations on interstate discrimination and extraterritorial regulation. See Instructional Sys. v. Computer Curriculum Corp., 35 F.3d 813 (3d Cir. 1994). Do you agree?
(4) In another case a Washington choice-of-law clause was enforced in a contract between a Canadian franchisor and a California franchisee. 1-800-Got Junk LLC v. Superior Court, 116 Cal. Rptr. 3d 923 (Cal. Ct. App. 2010). Despite the lack of substantial relationship between Washington and the parties and transaction, the clause could be enforced because there was a reasonable basis for the choice of Washington law: A multistate franchisor would want to conduct business according to a single law and Washington was closest to the company’s Vancouver, Canada, headquarters. As with the Michigan franchise law in Banek, the California franchise law expressly prohibited the use of choice-of-forum clauses when the forum chosen was outside of California but did not expressly prohibit the use of choice-of-law clauses. A provision of the California law did state that “any condition, stipulation or provision purporting to bind any person to waive compliance with any provision of this law is contrary to public policy and void,” but the court found this provision inapplicable because Washington law actually provided stronger protections to franchisees than did California law.
(5) What should a court do when a choice-of-law clause specifies a law that, if applied, will invalidate the contract? Should it be enforced? Restatement (Second) §187 Comment e, n.4 provides:
On occasion, the parties may choose a law that would declare the contract invalid. In such situations, the chosen law will not be applied by reason of the parties’ choice. To do so would defeat the expectations of the parties which it is the purpose of the present rule to protect. The parties can be assumed to have intended that the provisions of the contract would be binding upon them.… If the parties have chosen a law that would invalidate the contract, it can be assumed that they did so by mistake. If, however, the chosen law is that of the state of the otherwise applicable law under the rule of §188, this law will be applied even when it invalidates the contract.
Why should parties be relieved of the unfortunate and perhaps unforeseen consequences of a choice-of-law clause in this context and not in others? Shouldn’t the parties be held to their bargain? What is different about a choice-of-law clause that invalidates the contract itself?
(6) Sometimes a court encounters a choice-of-law clause that, if applicable, would invalidate a clause or term of the contract rather than the contract as a whole. Courts are split regarding whether the choice-of-law clause should be considered a mistake as applied to the invalidated provision of the contract. Consider, for example, Kipin Industries, Inc. v. Van Deilen International, Inc., 182 F.3d 490 (6th Cir. 1999). In Kipin, plaintiff, a Pennsylvania corporation with its principal place of business in Pennsylvania, contracted with defendant, a Michigan corporation with its principal place of business in Michigan, to perform work at a site owned by a third party in Kentucky. The contract provided that it “shall be deemed to be executed in the State of Michigan, and should be construed according to Michigan Law,” and that disputes “shall be adjudicated by a court of competent jurisdiction sitting in the State of Michigan.” The contract also included an explicit prohibition against the placement of liens by plaintiff on the property of the third party. The lien waiver prohibition was invalid under Michigan law, which provided that “[a] person shall not require, as part of any contract for an improvement, that the right to a construction lien be waived in advance of work performed. A waiver obtained as part of a contract for an improvement is contrary to public policy, and shall be invalid.…” Mich. Comp. Laws Ann. §570.1115(1). Kentucky law, the law the court determined would apply in the absence of a choice-of-law clause, permitted parties to enter into pre-work lien waivers. After defendant failed to pay plaintiff for work that was performed, plaintiff filed suit against defendant and placed a lien on the third party’s property, an action that defendant challenged in the lawsuit against it. Citing the Restatement comment above, the Sixth Circuit determined that, although Michigan law would apply to the contract more generally, the choice of Michigan law would be deemed a “mistake” as applied to the lien waiver provision. Does this determination seem sensible to you? Isn’t a choice of law that invalidates a term of the contract different from a choice of law that invalidates the entire contract? Isn’t the inference of mistake more powerful in the latter context? And is it problematic to apply Michigan law to parts of the contract and Kansas law to others? Would a court have allowed the parties to do that directly?
Regarding the scope of the choice-of-law clause, do you agree with the Kipin court’s conclusion that the choice-of-law clause—providing that the contract should be “construed” according to Michigan law—was meant to include not only Michigan rules of contract interpretation, but rather all of Michigan substantive law? Under what law should the court interpret the choice-of-law clause to reach this conclusion? For a different view of a similar clause, see Heating & Air Specialists Inc. v. Jones, 180 F. 3d 923, 930 (8th Cir. 1999) (concluding that clause providing that “laws of the State of Texas shall govern [the contract’s] interpretation” referred to Texas contract interpretation rules and did not preclude application of otherwise applicable Arkansas law).
(7) Professors O’Hara and Ribstein have argued that the expansion of party autonomy in choice of law both promotes individual welfare and pressures legislatures to enact efficient laws. See O’Hara & Ribstein, The Law Market (2009); O’Hara & Ribstein, From Politics to Efficient in Choice of Law, 67 U. Chi. L. Rev. 1151 (2000); Kobayashi & Ribstein, Choosing Law by Contract, in The Fall and Rise of Freedom of Contract 325 (1999).
Cook Sign Co. v. Combs
2008 WL 3898267
Court of Appeals of Minnesota
Appellant challenges the district court’s grant of a temporary injunction prohibiting him from violating his noncompete agreement with respondent. Because we conclude that the noncompete agreement was supported by consideration, Minnesota law was the proper choice of law, and the district court did not abuse its discretion in granting the temporary injunction, we affirm.
[Cook Sign Company, a North Dakota Corporation, is in the business of designing, fabricating, installing, and servicing custom-manufactured signs. Cook purchased much of the assets of Art-N-Sign, a Minnesota, sign-manufacturing company, in January 2007, and, in the process, it offered employment to Daniel Combs, an Art-N-Sign employee for more than 10 years. On January 20, 2007, Combs met with Cook’s CEO, Dave Walstad, to discuss Combs’s coming to work for respondent. Walstad stated in an affidavit that, after that meeting, “[appellant] knew that he would be required to sign the noncompete agreement as a condition of working at Cook.” The specific terms of the noncompete were not discussed, however. Combs signed the employment offer when he arrived for work the next day. The employment offer contained a clause referring to (but not actually containing) the noncompete agreement:
A signing bonus of $2,500 will be paid during the first check run of your term of employment. In addition, if your annual income for 2007 is not greater than $55,000, a second half payment of $2,500 will be paid in January 2008.
In return for this income guarantee and signing bonus, we ask that you sign a 1 year [noncompete] agreement.
The employment agreement stated that disputes would be resolved according to North Dakota law. Combs signed the noncompete agreement early the following month. This agreement identifies Minnesota as the choice of law for resolution of disputes.
In June 2007, Combs resigned his position at Cook and accepted a sales position with Indigo SignWorks, a North Dakota company. Cook initiated litigation, obtained a temporary restraining order, and then obtained a temporary injunction enjoining Combs from working for Indigo. Combs appealed.]
Appellant argues that North Dakota law should be applied because it is the law that governs the employment agreement. Respondent asserts that the applicable law is that of Minnesota as explicitly stated by the noncompete agreement. After a careful and thorough analysis, the district court determined that Minnesota was the proper choice of law.
When confronted with a choice-of-law question, it must first be established that there is an actual conflict between the laws of the two states. Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 454 (Minn. App. 2001). There is a clear conflict in this case because North Dakota does not recognize noncompete agreements,4 whereas Minnesota looks upon noncompete agreements with disfavor, but nonetheless, deems them “enforceable if they serve a legitimate employer interest and are not broader than necessary to protect this interest.” Kallok v. Medtronic, Inc., 573 N.W.2d 356, 361 (Minn. 1998).
The next step is to balance guiding factors established by the Minnesota Supreme Court. These factors are: (1) predictability of result; (2) maintenance of interstate and international order; (3) simplification of the judicial task; (4) advancement of the forum’s governmental interest; and (5) application of the better rule of law.
A. PREDICTABILITY OF RESULT
The factor applies primarily to consensual transactions where the parties desire advance notice of which state law will govern in future disputes. It is intended to protect the justified expectations of the parties to the transaction. There is a clear choice-of-law provision in the noncompete agreement. It states: “Construction and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of Minnesota.” The plain language of the agreement provides for the application of Minnesota law. This is what the parties bargained for, and their choice should not be altered without good reason.
Appellant argues that the employment agreement is governed by North Dakota law, but because respondent knew that North Dakota would not enforce a noncompete agreement, respondent chose Minnesota law for the noncompete agreement. Appellant argues that this type of forum shopping is disfavored. The district court dispatched this argument succinctly:
Even though the Employment Offer elects the laws of the State of North Dakota, the Agreement, not the Employment Offer, is the focus of this litigation. As such, in carefully construing the terms of the Agreement, the Court concludes that the language contained therein provides that the laws of the State of Minnesota shall govern and the Agreement itself provided the parties with notice of such.
This factor favors applying Minnesota law.
The primary issue under this factor is whether applying Minnesota law would manifest disrespect for North Dakota’s sovereignty or impede interstate commerce. “Evidence of forum shopping, or that application of Minnesota’s law would promote forum shopping, would indicate such disrespect.” Id.
Appellant claims that respondent was forum shopping because, as a North Dakota company, it knew that North Dakota would not enforce the noncompete agreement. Therefore, it chose Minnesota law to govern the noncompete agreement. Appellant argues that this conduct manifests a lack of respect for the law and sovereignty of North Dakota. Respondent asserts that North Dakota has no interest in this case because appellant is a Minnesota resident who lives and works in Minnesota.
Once again, the district court correctly addressed this issue:
While [appellant] argues that [respondent] is forum shopping in its selection of Minnesota law, the Court again finds that the plain language of the agreement dictates that it is governed by the laws of the State of Minnesota. As such, applying Minnesota law is not evidence of forum shopping, nor would its application promote forum shopping—the application of Minnesota law was considered and agreed to by the parties.
Because the parties explicitly agreed to apply Minnesota law in the noncompete agreement, it is not disrespectful to North Dakota to apply Minnesota law to this dispute. This factor favors applying Minnesota law.
C. SIMPLIFICATION OF THE JUDICIAL TASK
This third factor is often considered insignificant because courts can as easily apply another state’s laws as their own. Although Minnesota courts are fully capable of applying the law of another state, the judicial task is obviously simplified when a Minnesota court applies Minnesota law.
Although this is generally the case, it would have been equally, if not more, simple to apply North Dakota law to this case. This is true because North Dakota will not enforce a noncompete agreement. Therefore, had the district court applied North Dakota law, it would have been unnecessary to analyze the temporary-injunction issue because the case would have been dismissed. Therefore, this factor does not seem to significantly favor application of either state’s law, although North Dakota law might be slightly favored.
D. ADVANCEMENT OF THE FORUM’S GOVERNMENTAL INTEREST
The fourth factor involves inquiry into the choice of law that would most effectively advance a “significant interest of the forum state.” “Minnesota’s governmental interests will most clearly be advanced by application of Minnesota law.” Hague v. Allstate Ins. Co., 289 N.W.2d 43, 49 (Minn. 1978).
Appellant admits that “[m]ost typically, Minnesota’s interests would be advanced by application of its law.” But he goes on to argue that because respondent engaged in forum shopping in its choice of Minnesota, this factor actually favors North Dakota. As previously discussed, both parties acknowledged the application of Minnesota law when they signed the agreement. Applying North Dakota law “would not advance Minnesota’s interests and would reduce the protection afforded under Minnesota law to employers who enter into legal noncompete contracts.” Advanced Bionics, 630 N.W.2d at 455. This factor favors applying Minnesota law.
E. APPLICATION OF THE BETTER RULE OF LAW
This factor “should be applied only when the choice-of-law question remains unresolved after the other factors are considered.” Id. Because three factors clearly favor Minnesota, and only one is neutral or slightly favors North Dakota, this factor is insignificant. The district court properly applied Minnesota law to this case.
Questions and Comments
(1) Because Cook Sign is an unpublished opinion, it is technically nonprecedential in Minnesota. Nevertheless, it has been favorably cited by a U.S. District Court in Minnesota and an Ohio state appellate court and relied upon by several litigants in their briefs. The opinion presents a unique combination of currently relevant choice-of-law issues. Note first that this court relied on the state’s default approach to choice of law, Leflar’s choice-influencing considerations, to determine whether the contractual choice of Minnesota law would be honored. Can you think of a reason why this court would not have proceeded with the now standard Second Restatement analysis? Does the court’s approach seem conceptually coherent?
(2) The Cook Sign court rejected Combs’s argument that Cook Sign was shopping for Minnesota law with its choice-of-law clause. Does that conclusion seem sound? Company attorneys drafting the employment agreement and the noncompete agreement were careful to produce two separate documents with two separate choices of law: North Dakota for the employment agreement and Minnesota for the noncompete clause. Should employers be permitted to engage in this type of depecage with a hybrid of laws governing different aspects of the employment relationship? Suppose that states engage in policy tradeoffs by bundling together compensation protections for employees and competition protections for employers. Does the use of two separate clauses enable a company to get its competition protections while avoiding the employee’s compensation protections? The court seems to think that forum shopping is not an issue because the parties chose Minnesota law, but there is no evidence in the record that Combs actually agreed to the choice of Minnesota law. Indeed, there is no evidence that he paid any attention to the clause, let alone understood the consequence of it. Is the court perhaps influenced by the fact that Combs was given a signing bonus in return for agreeing to the noncompete clause? Should that fact make a difference?
(3) States with generous enforcement of noncompete clauses enable employers to protect their investments in employee skills training and confidential information. States with less generous or no enforcement of noncompete clauses give priority to the employee’s ability to earn a livelihood. Given that Combs was based in Minnesota and Cook Sign in North Dakota, is the court correct that Minnesota has a governmental interest in enforcing its law here? If so, does the choice-of-law clause add to that interest in any way?
(4) Because state laws differ on the enforcement of noncompete clauses in employment contracts, the parties sometimes strategically file claims. When an employee leaves the firm to work for a competitor located in a state with no or poor enforcement of noncompete clauses, the first employer typically files suit in a court located in the state designated in the choice-of-law clause and that court typically enforces the choice-of-law clause. See, e.g., Medtronic, Inc. v. Gibbons, 684 F.2d 565 (8th Cir. 1982); Shipley Co. v. Kozlowski, 926 F. Supp. 28 (D. Mass. 1996). New employers often know before first employers that the employee is about to switch jobs, however, so sometimes the employee, with the assistance of the new employer, files a declaratory judgment action in a court located in the state of new employment. If that state is less generous regarding the enforcement of noncompete clauses, then the court is much less likely to enforce the choice-of-law clause. These latter courts typically rely on the public policy language of the Second Restatement to strike down the choice-of-law provision. See, e.g., Barnes Group, Inc. v. C & C Prods., Inc., 716 F.2d 1023 (4th Cir. 1983); Enron Capital & Trade Resources Corp. v. Pokalsky, 490 S.E.2d 136 (Ga. Ct. App. 1997); DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990). The ultimate result from this strategic litigation turns on the parties’ race to judgment, which the court might or might not assist. Although the full faith and credit clause requires all the other states to give effect to a final judgment, there is no constitutional requirement that courts stay their hands in response to a sister state’s issuance of a preliminary injunction. In these situations, courts can differ regarding the permissible actions of the parties and the merits of the enforceability of the covenant not to compete. See Ethicon Endo-Surgery, Inc. v. Pemberton, 2010 WL 5071848 (Mass. Super.).
Hall v. Sprint Spectrum L.P.
376 Ill. App. 3d 822, 876 N.E.2d 1036, 315 Ill. Dec. 446 (2007)
The defendants, Sprint Spectrum L.P. and SprintCom, Inc., both doing business as Sprint PCS Group (collectively referred to as Sprint), appeal … from an order of the circuit court of Madison County certifying a 48-state class in a putative class action lawsuit filed by the plaintiff, Jessica Hall. We affirm.
Sprint provides wireless communications services to millions of customers throughout the United States. Sprint is headquartered in Overland Park, Kansas, but operates and conducts its business throughout the United States, including within the State of Illinois.
In June 2003, Hall, a resident of Madison County, Illinois, entered into a cell phone service contract with Sprint at a Radio Shack store in Granite City, Illinois. In doing so, she agreed to be bound to a one-year contract and to pay a $150 early termination fee if she did not remain a customer for a full year. Hall’s account included two cell phone numbers.
[Later that year, Hall attempted to cancel her contract, but Sprint refused to assent to the cancellation unless Hall paid the early termination fee. In addition, Sprint insisted that she pay the fee twice, once for each of her cell phone numbers.
Hall filed a class action complaint and a motion for class action certification in the trial court. She alleged five causes of action: (1) breach of contract; (2) violation of the Kansas Consumer Protection Act (Kan. Stat. Ann. §50-623 et seq. (West 2005)); (3) statutory fraud under the Illinois Consumer Fraud Act and the consumer protection statutes of the other states where Sprint does business; (4) unjust enrichment; and (5) relief from unlawful penalties. Each cause of action rested on the theory that early termination fees are unlawful penalties. The complaint sought damages for all early termination fees Sprint had collected from U.S. consumers.]
In her first amended complaint, Hall alleged that Sprint placed the following express choice-of-law provision in all of its contracts: “This Agreement is governed by and must be construed under federal law and the laws of the State of Kansas, without regard to choice of law principles.” Accordingly,… the first amended complaint alleged that Kansas common law should be applied nationally (counts 1, 4, and 5) and the Kansas Consumer Protection Act should be applied nationally (count 2) or that the Illinois Consumer Fraud Act should be applied to Illinois residents and the consumer fraud acts of the other 47 states should be applied to residents of those states (count 3).
[Following a hearing and motion to reconsider, the trial court entered a formal, written order, certifying the following 48-state class: “All persons who were charged a Sprint Early Termination Fee because they canceled their cellular or wireless agreement before the end of its term.” The order contemplates the application of Kansas law based on the express choice-of-law provision contained in Sprint’s form contract.]
This court granted Sprint’s petition for leave to appeal.
[The court first determined that the trial court’s class certification was predicated upon the application of Kansas law to all of plaintiffs’ claims based on the choice-of-law provision contained in Sprint’s form contract.]
Sprint next argues that if the 48-state class certification was predicated upon the application of the Kansas Consumer Protection Act, the order must be reversed for two reasons: (1) based on the language of the statute, the Kansas Consumer Protection Act, like the Illinois Consumer Fraud Act, cannot be applied extraterritorially; and (2) the Kansas Consumer Protection Act cannot be applied to all class members because the choice-of-law provision does not govern noncontractual claims, such as statutory fraud. We disagree.
This is not a case like Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill. 2d 100 (2005), where the plaintiff sought extraterritorial application of a statute based on the terms of the statute. Instead, in this case, the trial court enforced a voluntary and broadly worded choice-of-law provision in an adhesion contract drafted by Sprint to determine the validity and legality of a provision within the same contract—the early termination fee provision.
Sprint’s choice-of-law provision states that the agreement should be governed by the law of Kansas. The only issue in this case is the validity of the early termination fee, and by the parties’ own choice, that issue is governed by Kansas law. The fact that Kansas law might not otherwise apply is irrelevant, because the parties chose to apply Kansas law.
Ordinarily, Illinois follows the Restatement (Second) of Conflict of Laws (1971) in making choice-of-law decisions. Section 187 of the Restatement applies when the parties, as here, have made an express choice of law in their contract. Section 187(2) of the Restatement (Second) of Conflict of Laws provides, in pertinent part:
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied … unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of §188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
The public policy of a State must be sought in its constitution, legislative enactments[,] and judicial decisions.
In the present case, there is no question that Kansas and Missouri have a “substantial relationship to the parties or the transaction,” because defendant SprintCom, Inc., is a Kansas corporation with its principal place of business in Kansas and defendant Sprint Spectrum L.P. is a Missouri limited partnership. In addition, there is no argument here that the Illinois constitution or legislative enactments articulate a public policy against applying a foreign state’s consumer protection laws or that Illinois has a “materially greater interest” in the litigation than Kansas or Missouri. Therefore, the trial court properly found that the express choice-of-law provision contained in Sprint’s form contract governs the contract.
These principles apply with equal force to the interpretation of the contract at issue and to the validity of its provisions. See Restatement (Second) §187(2), Comment e, at 565 (“Prime objectives of contract law are to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract. These objectives may best be attained in multistate transactions by letting the parties choose the law to govern the validity of the contract and the rights created thereby. In this way, certainty and predictability of result are most likely to be secured. Giving parties this power of choice is also consistent with the fact that, in contrast to other areas of the law, persons are free within broad limits to determine the nature of their contractual obligations”).
Sprint argues that because the Kansas Consumer Protection Act does not purport to have any extraterritorial application, it cannot be applied to any transaction that occurred outside Kansas, notwithstanding the parties’ express choice-of-law provision stating that Kansas law would apply. Sprint argues that the Kansas Consumer Protection Act applies only to a “consumer transaction” (see Kan. Stat. Ann. §§50-626(a), 50-627(a) (West 2005)), which is defined as “a sale, lease, assignment[,] or other disposition for value of property or services within this state” (emphasis added) (Kan. Stat. Ann. §50-624(c) (West 2005)).
However, the issue is not the territorial application of the Kansas Consumer Protection Act but whether the parties chose to apply Kansas law to govern the validity of the provisions in their contract. The fact that Kansas law might not otherwise apply is irrelevant because the parties expressly agreed that Kansas law would apply. See Davis v. Miller, 269 Kan. 732, 739 (2000) (“Despite the legislative intent and the clear language of the [act], parties can bind themselves to the provisions of an otherwise inapplicable act by incorporating choice of law provisions in an enforceable contract. As long as application of a statute or act is not contrary to public policy, a court will uphold application of an otherwise inapplicable statute or act”); Bartlett Bank & Trust Co. v. McJunkins, 147 Ill. App. 3d 52, 59 (1986) (“Even where the [Uniform Commercial] Code is otherwise inapplicable, the parties may incorporate the Code into their agreement and that agreement will be given effect”). Therefore, the trial court properly found that the parties bound themselves to the provisions of the Kansas Consumer Protection Act by incorporating the express choice-of-law provision in their enforceable contract.
Sprint also argues that Hall’s claims are “noncontractual” and, therefore, that the choice-of-law provision should not apply to them. Hall has alleged a variety of claims, including breach of contract and statutory fraud. Each of these claims is based on the theory that the early termination fee is an unlawful penalty. The principle that a contract penalty is illegal and unenforceable is, itself, fundamentally a creature of contract law. See Restatement (Second) of Contracts §356, Comment a, at 157 (1981) (“[T]he parties to a contract are not free to provide a penalty for its breach. The central objective behind the system of contract remedies is compensatory, not punitive. Punishment of a promisor for having broken his promise has no justification on either economic or other grounds and a term providing such a penalty is unenforceable on grounds of public policy”). Hall’s various claims do not reflect differing sources of the law so much as alternative theories whereby she and the other class members can bring an action to enforce the same underlying legal principle that comes from contract law, not tort law.
Before Avery, Illinois courts traditionally held that where a contract contained an express choice-of-law provision, the consumer protection law of the designated state would apply.
In Avery, the Illinois Supreme Court held, “[A] plaintiff may pursue a private cause of action under the Consumer Fraud Act if the circumstances that relate to the disputed transaction occur primarily and substantially in Illinois.” Avery, 216 Ill. 2d at 187. The court in Avery discussed Martin v. Heinold Commodities, Inc., 117 Ill. 2d 67 (1987), wherein the Illinois Supreme Court allowed the certification of the claims of the plaintiff class under the Illinois Consumer Fraud Act even with respect to the non-Illinois plaintiffs. Although the court in Martin held that the application of Illinois law to a multistate class was consistent with principles of due process, the court in Avery noted that the Martin court did not address the scope of the Illinois Consumer Fraud Act as a matter of statutory interpretation. The Avery court did not overrule Martin but, instead, distinguished it as follows:
In Martin…, this court specifically based its decision on the following facts: (1) the contracts containing the deceptive statements were all executed in Illinois; (2) the defendant’s principal place of business was in Illinois; (3) the contract contained express choice-of-law and forum-selection clauses specifying that any litigation would be conducted in Illinois under Illinois law; (4) complaints regarding the defendant’s performance were to be directed to its Chicago office; and (5) payments for the defendant’s services were to be sent to its Chicago office. Given these circumstances, this court concluded that the [Illinois Consumer Fraud] Act could apply to the whole class. (Emphasis added.) Avery, 216 Ill. 2d at 189.
The Avery court found that, unlike Martin, virtually no circumstances relating to the disputed claims and practices at issue occurred or existed in Illinois for those plaintiffs who were not Illinois residents. Therefore, the Avery court concluded, “[T]he circuit court erred in certifying a nationwide class that included class members whose claims proceedings took place outside Illinois.” Avery, 216 Ill. 2d at 190. Because the court decided the propriety of the certification order on statutory interpretation grounds, it declined to consider whether the certification of the nationwide class was unconstitutional or violated express choice-of-law rules.
In the present case, as in Martin and unlike in Avery, the parties’ contract contained an express choice-of-law provision. Moreover, as this court recently stated in Barbara’s Sales, Inc. v. Intel Corp., 367 Ill. App. 3d 1013 (2006), “Avery in no way breaks with choice-of-law precedent and does not change the choice-of-law analysis to be applied.” Therefore, under the express choice-of-law provision contained in the parties’ contract, Kansas law, including the Kansas Consumer Protection Act, is applicable.
Sprint next argues that applying the Kansas Consumer Protection Act to non-Kansas class members would violate their due process rights under Phillips Petroleum Co. v. Shutts [page 326 supra]. We disagree.
In Phillips Petroleum Co., the United States Supreme Court stated:
Kansas must have a ‘significant contact or significant aggregation of contacts’ to the claims asserted by each member of the plaintiff class, contacts ‘creating state interests,’ in order to ensure that the choice of Kansas law is not arbitrary or unfair.…
When considering fairness in this context, an important element is the expectation of the parties.
Because Sprint’s form contract contained an express choice-of-law provision, the class members had reason to anticipate that Kansas law would govern their consumer fraud claim. Accordingly, enforcing the express choice-of-law provision is consistent with fulfilling the expectations of the parties and is not arbitrary or unfair. As long as the law chosen in the contract satisfies the “substantial relationship to the parties or the transaction” test, as it does in this case, enforcing it will not violate due process. See [Restatement (Second) §187(2)(a)].
Questions and Comments
(1) Sprint placed a choice-of-law clause in its contracts and, as a result, all consumer rights will be determined according to the law of Kansas despite the fact that consumers play no material role in the choice of Kansas law. As a general matter, should companies be permitted to use a choice-of-law clause to circumvent the consumer protection laws of the State where the consumer resides? At least in part, State consumer protection laws are intended to protect consumers from the fact that they pay attention to only a very few terms in the contracts that they sign. Why then hold the consumer to a choice-of-law clause, the import of which the consumer almost assuredly largely or completely ignored?
(2) For the most part, the Uniform Commercial Code allows contracts to specify the governing law so long as the transaction bears a reasonable relation to the state whose law is chosen. A recent UCC amendment would have replaced the reasonable relationship test with a bifurcated treatment of choice-of-law clauses. The amendment would have expanded permissible choices for commercial parties by enabling parties to nonconsumer contracts to choose even unrelated law for their contracts. At the same time, it would have shrunk permissible choices in consumer contracts by disenabling companies from using choice-of-law clauses to circumvent mandatory consumer rules in the state of the consumer’s residence (or place of ordering and delivery). That amendment was abandoned in 2008 after widespread rejection by state legislatures. See UCC §1-301 (2008 Amendments).
(3) The European Union has recently adopted choice-of-law rules to be applied throughout the EU. Rome I Regulation on the law applicable to contractual obligations, Regulation (EC) No. 593/2008, provides in Article 6 that choice-of-law clauses are enforceable in consumer contracts but in general they are not permitted to be used to circumvent mandatory consumer protection rules in the consumer’s habitual country of residence (with a limited exception if the counterparty conducts no business there). This consumer protection does not apply to financial instruments or to contracts in furtherance of the customer’s profession. A similar approach is taken for individual employment contracts. There too choice-of-law clauses are permitted, but Article 8 states that they cannot be used to deprive employees of protections afforded by the mandatory laws of the place that the employee habitually carries out her work.
(4) Note that even when effective, choice-of-law clauses take away only the consumer’s private right of action under her home state consumer protection laws. State attorneys general are typically empowered to bring enforcement actions against offending firms under the consumer protection statutes. Is that avenue sufficient? At least one court thought not. In a case striking down a New York choice-of-law clause as applied to Kentucky consumers who sued their Internet service provider for uncompensated service failures, the Kentucky Supreme Court stated:
We acknowledge that customers could pursue a remedy through the Attorney General, who is vested with authority under the Kentucky Consumer Protection Act to pursue litigation against companies who would improperly overcharge its customers. However, as noted by the Attorney General, “with the limited resources of the Commonwealth the Attorney General is simply unable to pursue each and every violator and must limit its case selection to those matters involving the greatest public interest.” Brief of the Attorney General of Kentucky, pg. 4. Accordingly, the theoretical availability of this remedy does not alter our conclusions.
Schnuerle v. Insight Communications Co, L.P., 2010 WL 5129850 at 5, n.5 (Ky.). Wouldn’t a state with a fundamental policy and a materially greater interest allocate sufficient resources to its AG’s office to pursue public actions against those who violate the fundamental policy? What is the difference between “the greatest public interest” mentioned in Schnuerle and “fundamental policy” from the Second Restatement?
(5) Choice-of-law clauses provide companies with other significant benefits mentioned earlier in this chapter, including uniformity, predictability, and fit. Given these benefits, company disputes with a consumer often include a fight over the choice-of-law clause, with the company seeking enforcement of its clause and the consumer seeking to have it stricken from the contract. In today’s consumer class action environment, however, the arguments are sometimes reversed, as they were in Hall. The topic of choice of law in class actions will be explored in greater depth in chapter 10. For now, note that Sprint’s choice of Kansas law helped to establish that the plaintiffs’ claims involved “common issues of law and fact” as required for class certification. Sprint hoped to defeat the class action certification so that it could force consumers to bring their claims against Sprint individually. For this reason, it actually argued that the court should strike down its own clause.
(6) The Hall court found irrelevant the fact that the Kansas legislature did not intend for its law to apply extraterritorially. Can parties decide that a law applies even if the legislature states otherwise? Should the answer depend on whether the state intended a narrow territorial application out of deference to other states or due to a conviction that broader application would constitute poor policy? Courts are split on the question whether parties can choose a law in circumstances where the enacting legislature indicated, explicitly or implicitly, that the law should not apply. Compare 1-800-Got Junk? LLC v. Superior Court, supra page 704 (permissible for franchise contract between Canadian franchisor and California franchisee to designate Washington law even though Washington franchise protection statute does not, by its terms, apply to out-of-state franchises) with Taylor v. 1-800-Got Junk? LLC, 387 Fed. Appx. 727 (9th Cir. 2010) (Washington franchise law does not apply to dispute between Canadian franchisor and Oregon franchisee by its terms despite Washington choice-of-law clause).
(7) Would it be constitutionally permissible for a state to attempt to prevent parties from choosing its law if it would not otherwise apply? Put differently, if in Tennessee Coal, Iron & Railroad Co. v. George, supra page 350, Alabama was not permitted to create a law and restrict its enforcement to its own courts, may a state create a law but limit the locational facts to which it applies? Would the problem be one of privileges and immunities? If a state cannot effectively limit private parties from choosing its law, does that have a chilling effect on law creation? Might party choice actually encourage legal innovation?
(8) The Hall court concluded that it was constitutionally permissible for Kansas law to apply to all of the contracts because the express choice-of-law provision ensures that the application of Kansas law is neither arbitrary nor fundamentally unfair under the due process and full faith and credit clauses. Surely the presence of a choice-of-law clause in a contract helps to prevent unfair surprise, and, in this case, Kansas had a significant connection to the transaction and claims because Sprint is headquartered there. Consider a different case, however, one where the parties choose a law that has no direct connection to the parties or their transaction. Under the Second Restatement, even if the chosen state has no substantial relationship to the parties or the transaction, the choice of law can be valid if there is another reasonable basis for the parties’ choice. Restatement (Second) §187(2)(a). Might that choice nevertheless fail constitutional scrutiny if there is no “significant contact or significant aggregation of contacts” “creating state interests” in the application of the chosen law? The Supreme Court of Mississippi apparently thought so. In Sentinel Industrial Contracting Corp. v. Kimmins Industrial Service Corp., 743 So. 2d 954 (Miss. 1999), a subcontractor sued a general contractor for failure to pay for extra costs associated with the subcontractor’s performance under the contract. The general contractor had contracted with Exxon Chemical Fertilizer Company to dismantle an ammonia plant located in Mississippi and reassemble it in Pakistan, and that contract provided that it was to be governed by the law of Texas. When the subcontractor argued that the choice-of-law clause in the main contract should apply to the subcontract because the main contract was incorporated into the subcontract by reference, the Mississippi court disagreed, stating that because Texas has little contact with or interest in the outcome of a contract dispute involving parties from elsewhere and work to be performed in Mississippi, applying Texas law in the case would be unconstitutional.
B. Choice-of-Court Clauses
The Bremen v. Zapata Off-Shore Co.
407 U.S. 1 (1972)
Chief Justice BURGER delivered the opinion of the Court.
We granted certiorari to review a judgment of the United States Court of Appeals for the Fifth Circuit declining to enforce a forum-selection clause governing disputes arising under an international towage contract between petitioners and respondent. The circuits have differed in their approach to such clauses. For the reasons stated hereafter, we vacate the judgment of the Court of Appeals.
In November 1967, respondent Zapata, a Houston-based American corporation, contracted with petitioner Unterweser, a German corporation, to tow Zapata’s ocean-going, self-elevating drilling rig Chaparral from Louisiana to a point off Ravenna, Italy, in the Adriatic Sea, where Zapata had agreed to drill certain wells.
Zapata had solicited bids for the towage, and several companies including Unterweser had responded. Unterweser was the low bidder and Zapata requested it to submit a contract, which it did. The contract submitted by Unterweser contained the following provision, which is at issue in this case:
Any dispute arising must be treated before the London Court of Justice.
In addition the contract contained two clauses purporting to exculpate Unterweser from liability for damages to the towed barge.
After reviewing the contract and making several changes, but without any alteration in the forum-selection or exculpatory clauses, a Zapata vice president executed the contract and forwarded it to Unterweser in Germany, where Unterweser accepted the changes, and the contract became effective.
On January 5, 1968, Unterweser’s deep sea tug Bremen departed Venice, Louisiana, with the Chaparral in tow bound for Italy. On January 9, while the flotilla was in international waters in the middle of the Gulf of Mexico, a severe storm arose. The sharp roll of the Chaparral in Gulf waters caused its elevator legs, which had been raised for the voyage, to break off and fall into the sea, seriously damaging the Chaparral. In this emergency situation Zapata instructed the Bremen to tow its damaged rig to Tampa, Florida, the nearest port of refuge.
On January 12, Zapata, ignoring its contract promise to litigate “any dispute arising” in the English courts, commenced a suit in admiralty in the United States District Court at Tampa, seeking $3,500,000 damages against Unterweser in personam and the Bremen in rem, alleging negligent towage and breach of contract.…
We hold, with the six dissenting members of the Court of Appeals, that far too little weight and effect were given to the forum clause in resolving this controversy. For at least two decades we have witnessed an expansion of overseas commercial activities by business enterprises based in the United States. The barrier of distance that once tended to confine a business concern to a modest territory no longer does so. Here we see an American company with special expertise contracting with a foreign company to tow a complex machine thousands of miles across seas and oceans. The expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts. Absent a contract forum, the considerations relied on by the Court of Appeals would be persuasive reasons for holding an American forum convenient in the traditional sense, but in an era of expanding world trade and commerce, the absolute aspects of [this] doctrine … have little place and would be a heavy hand indeed on the future development of international commercial dealings by Americans. We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our courts.
Forum-selection clauses have historically not been favored by American courts. Many courts, federal and state, have declined to enforce such clauses on the ground that they were “contrary to public policy,” or that their effect was to “oust the jurisdiction” of the court. Although this view apparently still has considerable acceptance, other courts are tending to adopt a more hospitable attitude toward forum-selection causes. This view, advanced in the well-reasoned dissenting opinion in the instant case, is that such clauses are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be “unreasonable” under the circumstances. We believe this is the correct doctrine to be followed by federal district courts sitting in admiralty. It is merely the other side of the proposition recognized by this Court in National Equipment Rental, Ltd. v. Szukhent, holding that in federal courts a party may validly consent to be sued in a jurisdiction where he cannot be found for service of process through contractual designation of an “agent” for receipt of process in that jurisdiction. In so holding, the Court stated: “[I]t is settled … that parties to a contract may agree in advance to submit to the jurisdiction of a given court, to permit notice to be served by the opposing party, or even to waive notice altogether.” This approach is substantially that followed in other common-law countries including England. It is the view advanced by noted scholars and that adopted by the Restatement [Second] of the Conflict of Laws. It accords with ancient concepts of freedom of contract and reflects an appreciation of the expanding horizons of American contractors who seek business in all parts of the world. Not surprisingly, foreign businessmen prefer, as we do, to have disputes resolved in their own courts, but if that choice is not available, then in a neutral forum with expertise in the subject matter. Plainly, the courts of England meet the standards of neutrality and long experience in admiralty litigation. The choice of that forum was made in an arm’s-length negotiation by experienced and sophisticated businessmen, and absent some compelling and countervailing reason it should be honored by the parties and enforced by the courts.
The argument that such clauses are improper because they tend to “oust” a court of jurisdiction is hardly more than a vestigial legal fiction. It appears to rest at core on historical judicial resistance to any attempt to reduce the power and business of a particular court and has little place in an era when all courts are overloaded and when businesses once essentially local now operate in world markets. It reflects something of a provincial attitude regarding the fairness of other tribunals. No one seriously contends in this case that the forum-selection clause “ousted” the District Court of jurisdiction over Zapata’s action. The threshold question is whether that court should have exercised its jurisdiction to do more than give effect to the legitimate expectations of the parties, manifested in their freely negotiated agreement, by specifically enforcing the forum clause.
There are compelling reasons why a freely negotiated private international agreement, unaffected by fraud, undue influence, or overweening bargaining power, such as that involved here, should be given full effect. In this case, for example, we are concerned with a far from routine transaction between companies of two different nations contemplating the tow of an extremely costly piece of equipment from Louisiana across the Gulf of Mexico and the Atlantic Ocean, through the Mediterranean Sea to its final destination in the Adriatic Sea. In the course of the voyage, it was to traverse the waters of many jurisdictions. The Chaparral could have been damaged at any point along the route, and there were countless possible ports of refuge. That the accident occurred in the Gulf of Mexico and the barge was towed to Tampa in an emergency were mere fortuities. It cannot be doubted for a moment that the parties sought to provide for a neutral forum for the resolution of any disputes arising during the tow. Manifestly much uncertainty and possibly great inconvenience to both parties could arise if a suit could be maintained in any jurisdiction in which an accident might occur or if jurisdiction were left to any place where the Bremen or Unterweser might happen to be found.15 The elimination of all such uncertainties by agreeing in advance on a forum acceptable to both parties is an indispensable element in international trade, commerce, and contracting. There is strong evidence that the forum clause was a vital part of the agreement, and it would be unrealistic to think that the parties did not conduct their negotiations, including fixing the monetary terms, with the consequences of the forum clause figuring prominently in their calculations. Under these circumstances, as Justice Karminski reasoned in sustaining jurisdiction over Zapata in the High Court of Justice, “[t]he force of an agreement for litigation in this country, freely entered into between two competent parties, seems to me to be very powerful.”
Thus, in the light of present-day commercial realities and expanding international trade we conclude that the forum clause should control absent a strong showing that it should be set aside. Although their opinions are not altogether explicit, it seems reasonably clear that the District Court and the Court of Appeals placed the burden on Unterweser to show that London would be a more convenient forum than Tampa, although the contract expressly resolved that issue. The correct approach would have been to enforce the forum clause specifically unless Zapata could clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching. Accordingly, the case must be remanded for reconsideration.
We note, however, that there is nothing in the record presently before us that would support a refusal to enforce the forum clause. The Court of Appeals suggested that enforcement would be contrary to the public policy of the forum under Bisso v. Inland Waterways Corp., because of the prospect that the English courts would enforce the clauses of the towage contract purporting to exculpate Unterweser from liability for damages to the Chaparral. A contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision. It is clear, however, that whatever the proper scope of the policy expressed in Bisso, it does not reach this case. Bisso rested on considerations with respect to the towage business strictly in American waters, and those considerations are not controlling in an international commercial agreement.…
Courts have also suggested that a forum clause, even though it is freely bargained for and contravenes no important public policy of the forum, may nevertheless be “unreasonable” and unenforceable if the chosen forum is seriously inconvenient for the trial of the action. Of course, where it can be said with reasonable assurance that at the time they entered the contract, the parties to a freely negotiated private international commercial agreement contemplated the claimed inconvenience, it is difficult to see why any such claim of inconvenience should be heard to render the forum clause unenforceable. We are not here dealing with an agreement between two Americans to resolve their essentially local disputes in a remote alien forum. In such a case, the serious inconvenience of the contractual forum to one or both of the parties might carry greater weight in determining the reasonableness of the forum clause. The remoteness of the forum might suggest that the agreement was an adhesive one, or that the parties did not have the particular controversy in mind when they made their agreement; yet even there the party claiming should bear a heavy burden of proof. Similarly, selection of a remote forum to apply differing foreign law to an essentially American controversy might contravene an important public policy of the forum. For example, so long as Bisso governs American courts with respect to the towage business in American waters, it would quite arguably be improper to permit an American tower to avoid that policy by providing a foreign forum for resolution of his disputes with an American towee.
This case, however, involves a freely negotiated international commercial transaction between a German and an American corporation for towage of a vessel from the Gulf of Mexico to the Adriatic Sea. As noted, selection of a London forum was clearly a reasonable effort to bring vital certainty to this international transaction and to provide a neutral forum experienced and capable in the resolution of admiralty litigation. Whatever “inconvenience” Zapata would suffer by being forced to litigate in the contractual forum as it agreed to do was clearly foreseeable at the time of contracting. In such circumstances it should be incumbent on the party seeking to escape his contract to show that trial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in court. Absent that, there is no basis for concluding that it would be unfair, unjust, or unreasonable to hold that party to his bargain.…
Zapata’s remaining contentions do not require extended treatment. It is clear that Unterweser’s action in filing its limitation complaint in the District Court in Tampa was, so far as Zapata was concerned, solely as a defensive measure made necessary as a response to Zapata’s breach of the forum clause of the contract.…
Justice DOUGLAS, dissenting.…
Respondent is a citizen of this country. Moreover, if it were remitted to the English court, its substantive rights would be adversely affected. Exculpatory provisions in the towage control provide (1) that petitioners, the masters and the crews “are not responsible for defaults and/or errors in the navigation of the tow” and (2) that “[d]amages suffered by the towed object are in any case for account of its Owners.”
Under our decision in Dixilyn Drilling Corp. v. Crescent Towing & Salvage Co., “a contract which exempts the tower from liability for its own negligence” is not enforceable, though there is evidence in the present record that it is enforceable in England. That policy was first announced in Bisso v. Inland Waterways Corp. Although the casualty occurred on the high seas, the Bisso doctrine is nonetheless applicable.
Moreover, the casualty occurred close to the District Court, a number of potential witnesses, including respondent’s crewmen, reside in that area, and the inspection and repair work were done there. The testimony of the tower’s crewmen, residing in Germany, is already available by way of depositions taken in the proceedings.
All in all, the District Court judge exercised his discretion wisely in enjoining petitioners from pursuing the litigation in England.
I would affirm the judgment below.
Carnival Cruise Lines, Inc. v. Shute
499 U.S 585 (1991)
Justice BLACKMUN delivered the opinion of the Court.
In this admiralty case we primarily consider whether the United States Court of Appeals for the Ninth Circuit correctly refused to enforce a forum-selection clause contained in tickets issued by petitioner Carnival Cruise Lines, Inc., to respondents Eulala and Russel Shute.
The Shutes, through an Arlington, Wash., travel agent, purchased passage for a 7-day cruise on petitioner’s ship, the Tropicale. Respondents paid the fare to the agent who forwarded the payment to petitioner’s headquarters in Miami, Fla. Petitioner then prepared the tickets and sent them to respondents in the State of Washington. The face of each ticket, at its left-hand lower corner, contained this admonition:
The following appeared on “contract page 1” of each ticket:
TERMS AND CONDITIONS OF PASSAGE CONTRACT TICKET
. . . . . . . . .
3. (a) The acceptance of this ticket by the person or persons named hereon as passengers shall be deemed to be an acceptance and agreement by each of them of all of the terms and conditions of this Passage Contract Ticket.
. . . . . . . . .
8. It is agreed by and between the passenger and the Carrier that all disputes and matters whatsoever arising under, in connection with or incident to this Contract shall be litigated, if at all, in and before a Court located in the State of Florida, U.S.A., to the exclusion of the Courts of any other state or country.”
The last quoted paragraph is the forum-selection clause at issue.
Respondents boarded the Tropicale in Los Angeles, Cal. The ship sailed to Puerto Vallarta, Mexico, and then returned to Los Angeles. While the ship was in international waters off the Mexican coast, respondent Eulala Shute was injured when she slipped on a deck mat during a guided tour of the ship’s galley. Respondents filed suit against petitioner in the United States District Court for the Western District of Washington, claiming that Mrs. Shute’s injuries had been caused by the negligence of Carnival Cruise Lines and its employees.
Petitioner moved for summary judgment, contending that the forum clause in respondents’ tickets required the Shutes to bring their suit against petitioner in a court in the State of Florida. Petitioner contended, alternatively, that the District Court lacked personal jurisdiction over petitioner because petitioner’s contacts with the State of Washington were insubstantial. The District Court granted the motion, holding that petitioner’s contacts with Washington were constitutionally insufficient to support the exercise of personal jurisdiction.
The Court of Appeals reversed. Reasoning that “but for” petitioner’s solicitation of business in Washington, respondents would not have taken the cruise and Mrs. Shute would not have been injured, the court concluded that petitioner had sufficient contacts with Washington to justify the District Court’s exercise of personal jurisdiction.
Turning to the forum-selection clause, the Court of Appeals acknowledged that a court concerned with the enforceability of such a clause must begin its analysis with The Bremen, where this Court held that forum-selection clauses, although not “historically … favored,” are “prima facie valid.” Id. The appellate court concluded that the forum clause should not be enforced because it “was not freely bargained for.” As an “independent justification” for refusing to enforce the clause, the Court of Appeals noted that there was evidence in the record to indicate that “the Shutes are physically and financially incapable of pursuing this litigation in Florida” and that the enforcement of the clause would operate to deprive them of their day in court and thereby contravene this Court’s holding in The Bremen. We granted certiorari to address the question whether the Court of Appeals was correct in holding that the District Court should hear respondents’ tort claim against petitioner. Because we find the forum-selection clause to be dispositive of this question, we need not consider petitioner’s constitutional argument as to personal jurisdiction.…
We begin by noting the boundaries of our inquiry. First, this is a case in admiralty, and federal law governs the enforceability of the forum-selection clause we scrutinize. Second, we do not address the question whether respondents had sufficient notice of the forum clause before entering the contract for passage. Respondents essentially have conceded that they had notice of the forum-selection provision. Additionally, the Court of Appeals evaluated the enforceability of the forum clause under the assumption, although “doubtful,” that respondents could be deemed to have had knowledge of the clause.
Within this context, respondents urge that the forum clause should not be enforced because, contrary to this Court’s teachings in The Bremen, the clause was not the product of negotiation, and enforcement effectively would deprive respondents of their day in court. Additionally, respondents contend that the clause violates the Limitation of Vessel Owner’s Liability Act, 46 U.S.C. App. §183c. We consider these arguments in turn.
Both petitioner and respondents argue vigorously that the Court’s opinion in The Bremen governs this case, and each side purports to find ample support for its position in that opinion’s broad-ranging language. This seeming paradox derives in large part from key factual differences between this case and The Bremen, differences that preclude an automatic and simple application of The Bremen’s general principles to the facts here.
[The Court discusses the facts and holding of The Bremen, reproduced supra page 717.]
In applying The Bremen, the Court of Appeals in the present litigation took note of the foregoing “reasonableness” factors and rather automatically decided that the forum-selection clause was unenforceable because, unlike the parties in The Bremen, respondents are not business persons and did not negotiate the terms of the clause with petitioner. Alternatively, the Court of Appeals ruled that the clause should not be enforced because enforcement effectively would deprive respondents of an opportunity to litigate their claim against petitioner.
The Bremen concerned a “far from routine transaction between companies of two different nations contemplating the tow of an extremely costly piece of equipment from Louisiana across the Gulf of Mexico and the Atlantic Ocean, through the Mediterranean Sea to its final destination in the Adriatic Sea.” These facts suggest that, even apart from the evidence of negotiation regarding the forum clause, it was entirely reasonable for the Court in The Bremen to have expected Unterweser and Zapata to have negotiated with care in selecting a forum for the resolution of disputes arising from their special towing contract.
In contrast, respondents’ passage contract was purely routine and doubtless nearly identical to every commercial passage contract issued by petitioner and most other cruise lines. In this context, it would be entirely unreasonable for us to assume that respondents—or any other cruise passenger—would negotiate with petitioner the terms of a forum-selection clause in an ordinary commercial cruise ticket. Common sense dictates that a ticket of this kind will be a form contract the terms of which are not subject to negotiation, and that an individual purchasing the ticket will not have bargaining parity with the cruise line. But by ignoring the crucial differences in the business contexts in which the respective contracts were executed, the Court of Appeals’ analysis seems to us to have distorted somewhat this Court’s holding in The Bremen.
In evaluating the reasonableness of the forum clause at issue in this case, we must refine the analysis of The Bremen to account for the realities of form passage contracts. As an initial matter, we do not adopt the Court of Appeals’ determination that a nonnegotiated forum-selection clause in a form ticket contract is never enforceable simply because it is not the subject of bargaining. Including a reasonable forum clause in a form contract of this kind well may be permissible for several reasons: First, a cruise line has a special interest in limiting the fora in which it potentially could be subject to suit. Because a cruise ship typically carries passengers from many locales, it is not unlikely that a mishap on a cruise could subject the cruise line to litigation in several different fora. See The Bremen, 407 U.S., at 13. Additionally, a clause establishing ex ante the forum for dispute resolution has the salutary effect of dispelling any confusion about where suits arising from the contract must be brought and defended, sparing litigants the time and expense of pretrial motions to determine the correct forum and conserving judicial resources that otherwise would be devoted to deciding those motions. See Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 33 (1988). (concurring opinion). Finally, it stands to reason that passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys by limiting the fora in which it may be sued.
We also do not accept the Court of Appeals’ “independent justification” for its conclusion that The Bremen dictates that the clause should not be enforced because “[t]here is evidence in the record to indicate that the Shutes are physically and financially incapable of pursuing this litigation in Florida.” We do not defer to the Court of Appeals’ findings of fact. In dismissing the case for lack of personal jurisdiction over petitioner, the District Court made no finding regarding the physical and financial impediments to the Shutes’ pursuing their case in Florida. The Court of Appeals’ conclusory reference to the record provides no basis for this Court to validate the finding of inconvenience. Furthermore, the Court of Appeals did not place in proper context this Court’s statement in The Bremen that “the serious inconvenience of the contractual forum to one or both of the parties might carry greater weight in determining the reasonableness of the forum clause.” 407 U.S. at 17. The Court made this statement in evaluating a hypothetical “agreement between two Americans to resolve their essentially local disputes in a remote alien forum.” Ibid. In the present case, Florida is not a “remote alien forum,” nor—given the fact that Mrs. Shute’s accident occurred off the coast of Mexico—is this dispute an essentially local one inherently more suited to resolution in the State of Washington than in Florida. In light of these distinctions, and because respondents do not claim lack of notice of the forum clause, we conclude that they have not satisfied the “heavy burden of proof,” ibid., required to set aside the clause on grounds of inconvenience.
It bears emphasis that forum-selection clauses contained in form passage contracts are subject to judicial scrutiny for fundamental fairness. In this case, there is no indication that petitioner set Florida as the forum in which disputes were to be resolved as a means of discouraging cruise passengers from pursuing legitimate claims. Any suggestion of such a bad-faith motive is belied by two facts: Petitioner has its principal place of business in Florida, and many of its cruises depart from and return to Florida ports. Similarly, there is no evidence that petitioner obtained respondents’ accession to the forum clause by fraud or overreaching. Finally, respondents have conceded that they were given notice of the forum provision and, therefore, presumably retained the option of rejecting the contract with impunity. In the case before us, therefore, we conclude that the Court of Appeals erred in refusing to enforce the forum-selection clause.
[The Court then rejected the respondents’ argument based on the Limitation of Vessel Owner’s Liability Act.]
The judgment of the Court of Appeals is reversed.
Justice STEVENS, with whom Justice MARSHALL joins, dissenting.
The court prefaces its legal analysis with a factual statement that implies that a purchaser of a Carnival Cruise Lines passenger ticket is fully and fairly notified about the existence of the choice of forum clause in the fine print on the back of the ticket. Even if this implication were accurate, I would disagree with the Court’s analysis. But, given the Court’s preface, I begin my dissent by noting that only the most meticulous passenger is likely to become aware of the forum-selection provision. I have therefore appended to this opinion a facsimile of the relevant text, using the type size that actually appears in the ticket itself. A careful reader will find the forum-selection clause in the 8th of the 25 numbered paragraphs.
Of course, many passengers, like the respondents in this case, will not have an opportunity to read paragraph 8 until they have actually purchased their tickets. By this point, the passengers will already have accepted the condition set forth in paragraph 16(a), which provides that “[t]he Carrier shall not be liable to make any refund to passengers in respect of … tickets wholly or partly not used by a passenger.” Not knowing whether or not that provision is legally enforceable, I assume that the average passenger would accept the risk of having to file suit in Florida in the event of an injury, rather than canceling—without a refund—a planned vacation at the last minute. The fact that the cruise line can reduce its litigation costs, and therefore its liability insurance premiums, by forcing this choice on its passengers does not, in my opinion, suffice to render the provision reasonable. Cf. Steven v. Fidelity & Casualty Co. of New York, 58 Cal. 2d 862, 883 (1962) (refusing to enforce limitation on liability in insurance policy because insured “must purchase the policy before he even knows its provisions”).
Forum-selection clauses in passenger tickets involve the intersection of two strands of traditional contract law that qualify the general rule that courts will enforce the terms of a contract as written. Pursuant to the first strand, courts traditionally have reviewed with heightened scrutiny the terms of contracts of adhesion, form contracts offered on a take-or-leave basis by a party with stronger bargaining power to a party with weaker power. Some commentators have questioned whether contracts of adhesion can justifiably be enforced at all under traditional contract theory because the adhering party generally enters into them without manifesting knowing and voluntary consent to all their terms. See, e.g., Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. Rev. 1173, 1179-1180 (1983); Slawson, Mass Contracts: Lawful Fraud in California, 48 S. Cal. L. Rev. 1, 12-13 (1974); K. Llewellyn, The Common Law Tradition 370-371 (1960).
The common law, recognizing that standardized form contracts account for a significant portion of all commercial agreements, has taken a less extreme position and instead subjects terms in contracts of adhesion to scrutiny for reasonableness. Judge J. Skelly Wright set out the state of the law succinctly in Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449-450 (1965) (footnotes omitted):
Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all of the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.
See also Steven, 58 Cal. 2d, at 879-883; Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358 (1960).
The second doctrinal principle implicated by forum-selection clauses is the traditional rule that “contractual provisions, which seek to limit the place or court in which an action may … be brought, are invalid as contrary to public policy.” See Dougherty, Validity of Contractual Provision Limiting Place or Court in Which Action May Be Brought, 31 A.L.R. 4th 404, 409, §3 (1984). See also Home Insurance Co. v. Morse, 20 Wall. 445, 451 (1874). Although adherence to this general rule has declined in recent years, particularly following our decision in The Bremen, the prevailing rule is still that forum-selection clauses are not enforceable if they were not freely bargained for, create additional expense for one party, or deny one party a remedy. See 31 A.L.R. 4th, at 409-438 (citing cases). A forum-selection clause in a standardized passenger ticket would clearly have been unenforceable under the common law before our decision in The Bremen, see 407 U.S., at 9, and n.10, and, in my opinion, remains unenforceable under the prevailing rule today.
The Bremen, which the Court effectively treats as controlling this case, had nothing to say about stipulations printed on the back of passenger tickets. That case involved the enforceability of a forum-selection clause in a freely negotiated international agreement between two large corporations providing for the towage of a vessel from the Gulf of Mexico to the Adriatic Sea. The Court recognized that such towage agreements had generally been held unenforceable in American courts but held that the doctrine of those cases did not extend to commercial arrangements between parties with equal bargaining power.
Questions and Comments
(1) Isn’t what’s really at stake in The Bremen the enforceability of the contractual clauses exculpating Unterweser from liability for damages? What does this suggest about the relationship between choice-of-forum clauses and choice of law? What about Justice Douglas’s argument that if a contractual term would be unenforceable in a U.S. court but enforceable in a London court, the parties should not be allowed to evade the application of U.S. law by litigating in London? Note that in all federal circuits that have considered the issue, English forum-selection and choice-of-law clauses in contracts between Lloyd’s of London and American names were deemed enforceable despite explicit provisions in the U.S. securities laws forbidding parties from contractually waiving their rights under the Acts. See Lipcon v. Underwriters at Lloyd’s, London, 148 F.3d 1285 (11th Cir. 1998) (discussing cases).
(2) In the context of interstate and international commerce, it can be very useful for parties to designate the place where their disputes will be resolved. As will be seen in the next section, contracting parties have very broad ability to contract for the arbitration of their disputes. Once parties can circumvent courts altogether, it seems less troublesome to allow them to stay in court but choose the forum. Perhaps this helps explain why the Supreme Court has so strongly endorsed the enforcement of choice-of-court clauses. Many of the states have followed suit. In addition, the Hague Convention on Choice of Court Agreements, concluded in 2005, calls for worldwide enforcement of choice-of-forum clauses as well as of the judgments rendered by courts selected in the parties’ contracts, subject to public policy exceptions. The Convention would not apply to consumer or employment contracts, and other subject matters are similarly excluded. But for international commercial entities, it would facilitate both court choice and judgment enforcement. To have force, at least two countries must accede to the Convention. So far only Mexico has ratified the Convention, but in 2009 both the United States and the European Union became signatories. If one or both actually accede to the Convention, other nations will likely follow suit. For analyses of how the Hague Convention might affect or be affected by litigation in U.S. courts, see Woodward, Saving the Hague Choice of Court Convention, 29 U. Pa. J. Intl. L. 657 (2008); Heiser, The Hague Convention on Choice of Court Agreements, 31 U. Pa. J. Intl. L. 1013 (2010).
(3) In support of its holding, The Bremen makes much of the fact that the choice-of-forum clause was negotiated at arm’s length. Carnival Cruise, by contrast, suggests that this factor is not particularly important. Which view is right? The dissent in Carnival Cruise is suspicious of contract clauses that are not individually bargained for. But isn’t the price term of this sort of contract often presented on a “take it or leave it” basis? The buyer can shop around for a better price, as he or she can shop for a cruise line without forum-selection clauses, but in many cases does not bargain with a particular seller for either a price reduction or for omitting the clause. Is there a meaningful distinction between these two types of contract provisions?
(4) The majority in Carnival Cruise suggests that it need not consider the claim that the Shutes did not have adequate notice of the provision because the notice issue had been conceded by the Shute’s brief. What would the majority do in cases in which the consumer did not see the fine print in time? Compare Oxman v. Amoroso, 659 N.Y.S.2d 963, 967 (City Ct. 1997) (forum-selection and choice-of-law clauses unenforceable because written in small and undistinguishable print unfit for consumer transactions) with Cross v. Kloster Cruise Lines, 897 F. Supp. 1304 (D. Or. 1995) (forum-selection clause on ticket enforceable despite being in very fine print with smudged pages since the plaintiff admitted that she noticed provision and demonstrated her ability to do so on the record).
Does a party even need to view a forum-selection clause for it to be binding? The Seventh Circuit thought not in Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1997), a case involving the enforceability of an arbitration agreement contained in the Statement of Terms that accompanied a computer ordered by telephone. The plaintiffs saw the Statement of Terms but never read them closely and never laid eyes on the arbitration agreement. Writing for the court, Judge Easterbrook reasoned:
A contract need not be read to be effective; people who accept [the computer] take the risk that the unread terms may in retrospect prove unwelcome. Terms inside Gateway’s box stand or fall together. If they constitute the parties’ contract because the Hills had an opportunity to return the computer after reading them, then all must be enforced.… Payment preceding the revelation of full terms is common for air transportation, insurance, and many other endeavors. Practical considerations support allowing vendors to enclose the full legal terms with their products. Cashiers cannot be expected to read legal documents to customers before ringing up sales. If the staff at the other end of the phone for direct-sales operations such as Gateway’s had to read the four-page statement of terms before taking the buyer’s credit card number, the droning voice would anesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time. And oral recitation would not avoid customers’ assertions (whether true or feigned) that the clerk did not read term X to them, or that they did not remember or understand it. Writing provides benefits for both sides of commercial transactions. Customers as a group are better off when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device. Competent adults are bound by such documents, read or unread.
Id. at 1148-1149. Is this reasoning persuasive? Does it apply to court choice-of-forum clauses in addition to arbitration agreements? Is it consistent with Carnival Cruise? Does the answer depend on whether the parties bound by the clause had the opportunity to cancel the contract without penalty? Compare Johnson v. Holland America Line-Westours, Inc., 206 Wis. 2d 562, 572 (Ct. App. 1996) (forum-selection clause not enforceable since plaintiffs received cruise tickets less than 45 days before departure and would have forfeited half of purchase price if they had thereafter canceled their trip); Corna v. American Hawaii Cruises, Inc., 794 F. Supp. 1005, 1012 (D. Haw. 1992) (refusing to enforce forum-selection clause where plaintiffs had no opportunity to reject the forum-selection clause without forfeiture of purchase price and additional penalties).
(5) Carnival Cruise also declined to consider the claim that the Shutes were unable to sue in Florida because the claim was supported by an inadequate factual record. What if it is prohibitively expensive or otherwise very inconvenient for parties to travel to the selected forum? Consider Sudduth v. Occidental Peruana, Inc., 70 F. Supp. 2d 691 (E.D. Texas 1999), a lawsuit in the United States between U.S. employees and their U.S. employer for unpaid benefits under a contract for work in the Peruvian jungle. The court declined to enforce the Peruvian forum-selection clause in the contract, reasoning:
The Defendants provided transportation to and from the foreign country and were fully aware that the only contact the Plaintiffs had with the forum was the completion of the project. All material facts and witnesses are located in the United States. The contracts were mailed from California to Texas and Louisiana, a majority of the documents were signed in Texas, and the breach of contract occurred when the correct salary due was not placed in the Plaintiffs’ bank accounts. In addition: the Plaintiffs’ employment was initially sought within the United States; Plaintiffs worked in Peru for a limited time period; salaries were paid by United States banks; transportation to and from South America was paid by the Defendants; and an inconvenient forum was surreptitiously chosen by the Defendant. This Court holds the Plaintiffs will be “deprived of their day in court” because of the grave inconvenience and unfairness in the enforcement of the forum selection clause. The inconvenience of trying this case extends past the difficulties in travel. Plaintiffs’ financial status and failing health require that the case should be tried in the Eastern District of Texas.… In addition, there is evidence that six of the eight Plaintiffs cannot afford the cost of travel to Peru, the expense of a trial in Peru, and the heavy burden of requiring a translator to translate communications between the Peruvian attorney and at the trial proceedings. The enforcement of the forum selection clause would be unfair because it would require every American party to travel to a foreign country to litigate an essentially local dispute.
Id. at 696-697. Is this reasoning consistent with Carnival Cruise? Should physical or financial inability to travel to the selected forum be a defense to the forum-selection clause’s enforcement? Does the court here mistakenly view its inquiry as whether the selected forum is the most convenient? Or is it performing a “fundamental fairness” analysis? For a different view of the relevance of convenience and expense to the enforcement of forum-selection clauses, see Design Strategy Corp. v. Nghiem, 14 F. Supp. 2d 298, (S.D.N.Y. 1998).
(6) Much of the commentary on Carnival Cruise has been critical. See, e.g., Borchers, Forum Selection Agreements in the Federal Courts After Carnival Cruise: A Proposal for Congressional Reform, 67 Wash. L. Rev. 55 (1992); Mullenix, Another Easy Case, Some More Bad Law: Carnival Cruise Lines and Contractual Personal Jurisdiction, 27 Tex. Intl. L.J. 323 (1992); Purcell, Geography as a Litigation Weapon: Consumers, Forum-Selection Clauses and the Rehnquist Court, 40 UCLA L. Rev. 423 (1992). This commentary focuses on the unfairness to the Shutes of being required to litigate in a distant forum against a wealthy corporation. Scholars have also attacked the Court’s economic analysis: “The [forum-selection clause] is not negotiated, the specific market is noncompetitive, the issue of forum choice is of trivial importance to an individual passenger ex ante, and the unadvised passenger cannot be expected to assign a suitable value to the clause; hence, the savings resulting from the enforcement of the clause went straight to the bottom line of Carnival Lines.” Carrington and Haagen, Contract and Jurisdiction, 1996 Sup. Ct. Rev. 331, 356.
A more sympathetic view of Carnival Cruise can be found in Solimine, Forum-Selection Clauses and the Privatization of Procedure, 25 Cornell Intl. L.J. 51 (1992). Solimine downplays the lack of bargaining power of purchasers, points out that form contracts reduce transaction costs, and notes that some studies show that Americans do not like bargaining; he additionally notes that the Shutes likely can retain Florida counsel without much difficulty. Id. at 83-84 & n.201.
Judge Posner takes an intermediate position:
Why might a court be more suspicious of a forum selection clause contained in a contract than of the contract itself? There are two reasons, one bad, one good. The bad reason is that courts used to look askance at agreements to “oust” their jurisdiction.… All this nonsense was swept away by Bremen.
Yet there really is something special about forum selection clauses after all. They could interfere with the orderly allocation of judicial business and injure other third-party interests (that is, interests of persons other than the parties to the contract containing the clause) as well. Suppose, to take an extreme but illustrative example, that the state and federal courts in Alaska became immensely popular forums for litigating contract disputes and as a result thousands of contracts were signed designating Alaska as the forum in the event of suit. Not only would these clauses impose great burdens on the courts in Alaska; they would impose great burdens on witnesses who were not employees of the parties (the inconvenience to employees would have been taken into account when the clause was drafted). The burdens on the Alaska courts would include not only the obvious ones but also the difficulty of having always to be applying other states’ laws, one of the considerations that has been thought to justify limiting parties’ power to specify by contract the law to be applied to their dispute if one arises. Restatement (Second) of Conflict of Laws §187(2)(a).
[T]he only good reason for treating a forum-selection clause differently from any other contract (specifically, from the contract in which the clause appears) is the possibility of adverse effects on third parties. Where that possibility is slight, the clause should be treated like any other contract. What is more, if any inconvenience to third parties can be cured by a change of venue under section 1404(a), that is the route to follow, rather than striking down the clause. This approach enables a clean separation between issues of general contract validity and the third-party consequences which alone justify treating the validity of a forum-selection clause differently from that of the contract that contains it.
Northwestern Natl. Ins. Co. v. Donovan, 916 F.2d 372, 376 (7th Cir 1990); see also id. (“If ever there was a case for stretching the concept of fraud in the name of unconscionability, it was Shute; and perhaps no stretch was necessary.”).
(7) In Smith, Valentino, & Smith, Inc. v. Superior Court, 17 Cal. 3d 491 (1976), the parties had agreed to a more interesting version of a forum-selecting and forum-ousting provision. The contract between a Pennsylvania corporation and a California corporation appointed as its agent for various purposes provided that if the California party brought suit it must be in Philadelphia, and if the Pennsylvania party brought suit it had to be in Los Angeles. The California party brought suit in California, and the Supreme Court of California refused to set aside an order of the lower court staying the proceedings. The court found nothing against public policy in such an agreement.
(8) The Supreme Court has held that denials of dismissal motions based on contractual forum-selection clauses are not immediately appealable in federal court. Lauro Lines s.r.l. v. Chasser, 490 U.S. 495 (1989) (no immediate appeal). The case involved a suit arising out of the hijacking of the Achille Lauro, and the District Court had refused to enforce the clause because the ticket gave insufficient notice to passengers that they were waiving their opportunity to sue in a domestic forum. State courts often do permit appeals when the trial court refuses to enforce a choice-of-court clause. See, e.g., In re Autonation, Inc., 228 S.W.3d 663 (Tex. 2007) (permitting appeal by writ of mandamus); Ex Parte Textron, Inc., 2011 WL 118255 (Ala.); Bernstein v. Wysoki, 77 A.D.3d 241 (N.Y. S. Ct. 2010) (permitting immediate appeal).
America Online, Inc. v. Superior Court of Alameda County
90 Cal. App. 4th 1, 108 Cal. Rptr. 2d 699 (1st App. Cal. 2001)
[This is a class action filed by former subscribers to America Online, Inc. (“AOL”), a Virginia Internet access provider, alleging that AOL continued to debit the class plaintiffs’ credit cards for monthly service fees after termination of plaintiffs’ AOL subscription. The complaint alleged violations of California’s Unfair Business Practices Act, Bus. & Prof. Code, §§17200 et seq., California’s CLRA, common law conversion/trespass, and common law fraud. AOL filed a motion to dismiss based on a forum-selection clause contained in AOL’s online “Terms of Service” (TOS) agreement. Paragraph 8 of the TOS, entitled “LAW AND LEGAL NOTICES,” states:
You expressly agree that exclusive jurisdiction for any claim or dispute with AOL or relating in any way to your membership or your use of AOL resides in the courts of Virginia and you further agree and expressly consent to the exercise of personal jurisdiction in the courts of Virginia in connection with any such dispute including any claim involving AOL or its affiliates, subsidiaries, employees, contractors, officers, directors, telecommunications providers and content providers.…
Additionally, paragraph 8 contained a choice of law provision designating Virginia law as being applicable to any dispute between the parties: “The laws of the Commonwealth of Virginia, excluding its conflicts-of-law rules, govern this Agreement and your membership.” The lead plaintiff described the TOS provision on his home computer as a “densely worded, small-size text that was hard to read on the computer screen.” The district court rejected AOL’s motion to dismiss, and AOL filed this petition for writ of mandamus. After holding that AOL had the burden of proof on the enforceability of the forum selection clause, the Court turned to consider the enforcement issue.]
B. OVERVIEW OF FORUM SELECTION CLAUSE ENFORCEMENT
AOL correctly posits that California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable. This favorable treatment is attributed to our law’s devotion to the concept of one’s free right to contract, and flows from the important practical effect such contractual rights have on commerce generally.
We agree with these sentiments, and view such clauses as likely to become even more ubiquitous as this state and nation become acculturated to electronic commerce. Moreover, there are strong economic arguments in support of these agreements, favoring both merchants and consumers, including reduction in the costs of goods and services and the stimulation of e-commerce.
But this encomium is not boundless. Our law favors forum selection agreements only so long as they are procured freely and voluntarily, with the place chosen having some logical nexus to one of the parties or the dispute, and so long as California consumers will not find their substantial legal rights significantly impaired by their enforcement. Therefore, to be enforceable, the selected jurisdiction must be “suitable,” “available,” and able to “accomplish substantial justice.” [The Bremen, supra page 717.] The trial court determined that the circumstances of contract formation did not reflect Mendoza’s exercised free will, and that the effect of enforcing the forum selection clause here would violate California public policy by eviscerating important legal rights afforded to this state’s consumers.
C. ENFORCEMENT OF THE FORUM SELECTION CLAUSE VIOLATES STRONG CALIFORNIA PUBLIC POLICY
California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state’s public policy.…
In Hall v. Superior Court, 150 Cal. App. 3d 411 (1983) (Hall), two California investors exchanged their interests in an oil and gas limited partnership in return for stock in one of their co-investors, Imperial Petroleum, Inc., a Utah corporation. Closer to the facts of this case, the contract embodying their exchange agreement contained both forum selection and choice of law provisions identifying Nevada as the selected forum and governing law. A dispute arose, and the two investors sued Imperial in California. Imperial asserted the forum selection clause, and the trial court found the forum selection clause was enforceable.
In reversing the lower court’s decision, the appellate court undertook an examination of both the choice of law clause as well as the forum selection clause noting that the enforceability of these clauses were “inextricably bound up” in one another. The reason for considering them together was that absent a choice of law clause, the selected forum could apply California law to the dispute under the selected forum’s conflict of laws principles. If so, there would be no risk that substantive law might be employed which would materially diminish rights of California residents in violation of California public policy. However, where the effect of the transfer would be otherwise, the forum selection clause would not be enforced: “While California does not have any public policy against a choice of law provision,… an agreement designating [a foreign] law will not be given effect if it would violate a strong California public policy…[or] result in an evasion of … a statute of the forum protecting its citizens.” Id. at 416-417.6
The Hall court determined that if the pending securities litigation were transferred to Nevada where Nevada law would be applied, the plaintiffs would lose the benefit of California’s Corporate Securities Law of 1968 which would otherwise govern the transaction in question. This California law was designed to protect the public from fraud and deception in securities matters, by providing statutory remedies for violations of the California Corporations Code. For this reason, the remedial scheme, like the CRLA involved in this case, contains an anti-waiver provision. Corp. Code, §25701. The court concluded: “We believe the right of a buyer of securities in California to have California law and its concomitant nuances apply to any future dispute arising out of the transaction is a ‘provision’ within the meaning of [Corporations Code] section 25701 which cannot be waived or evaded by stipulation of the parties to a securities transaction. Consequently, we hold the choice of Nevada law provision in this agreement violates section 25701 and the public policy of this state [citation] and for that reason deny enforcement of the forum selection clause as unreasonable.” Hall, supra at p.418.
The CLRA parallels the Corporate Securities Law of 1968, at issue in Hall, insofar as the CRLA is a legislative embodiment of a desire to protect California consumers and furthers a strong public policy of this state.… Certainly, the CLRA provides remedial protections at least as important as those under the Corporate Securities Law of 1968. Therefore, by parity of reasoning, enforcement of AOL’s forum selection clause, which is also accompanied by a choice of law provision favoring Virginia, would necessitate a waiver of the statutory remedies of the CLRA, in violation of that law’s anti-waiver provision, Civ. Code, §1751, and California public policy. For this reason alone, we affirm the trial court’s ruling.
This conclusion is reinforced by a statutory comparison of California and Virginia consumer protection laws, which reveals Virginia’s law provides significantly less consumer protection to its citizens than California law provides for our own. [The court notes that remedies under the Virginia law are less favorable to consumers than under California law, and that the Virginia law is hostile to class actions while class actions are an important consumer right under California law.] The unavailability of class action relief in this context is sufficient in and by itself to preclude enforcement of the TOS forum selection clause.
In addition to the unavailability of class actions and the apparent limitation in injunctive relief, neither punitive damages, nor enhanced remedies for disabled and senior citizens are recoverable under Virginia’s law. More nuanced differences are the reduced recovery under the VCPA for “unintentional” acts, a shorter period of limitations, and Virginia’s use of a Lodestar formula alone to calculate attorney fees recovery. Quite apart from the remedial limitations under Virginia law relating to injunctive and class action relief, the cumulative importance of even these less significant differences is substantial. Enforcement of a forum selection clause, which would impair these aggregate rights, would itself violate important California public policy. For this additional reason the trial court was correct in denying AOL’s motion to stay or to dismiss.
In so holding we reject Mendoza’s contention that the clause should not be enforced simply because it would be patently unreasonable to require him or otherAOL customers who form the putative class to travel to Virginia to litigate the relatively nominal individual sums at issue. He points out that in 1998 and 1999, not a single suit by a non-Virginia resident appears to have been filed in AOL’s Virginia home county, a development Mendoza suggests is directly related to the fact that the cost of prosecuting a claim in Virginia vastly exceeds the amounts normally at issue in individual claims against AOL.
But the additional cost or inconvenience necessitated by litigation in the selected forum is not part of the calculus when considering whether a forum selection clause should be enforced.… Yet Mendoza contends that [the California Supreme Court’s] admonition not to consider convenience and cost in evaluating the validity of forum selection clauses applies only where there remains a “practical option [of travel to the selected forum] in terms of the expense and value of the controversy.” As we understand it, Mendoza is arguing that expense in litigating in the selected forum can be considered if it exceeds the amount in controversy or at least renders the choice to litigate “impractical.”
We disagree.… No case of which we are aware has interpreted this language as Mendoza suggests we should. Moreover, it is not at all clear what monetary amount was in dispute in that case, or whether it was “practical” to bring the litigation in the selected forum. Although the current dispute between Mendoza and AOL might make it impractical for Mendoza to pursue an individual claim in Virginia, there may be other potential disputes between Mendoza and AOL arising from their relationship which would have significantly greater value. Are we to parse the enforceability of the forum selection clause, then, based on the economic value of the particular claim in issue, so that the clause can be enforced some of the time (depending on the value of the claim), but not all of the time? If so, should trial courts use an objective standard, or consider the proclivities of the individual claimant who may not feel litigation in the selected forum is worth it? How should trial judges calculate the costs of litigation? Should they consider the extent to which the selected forum allows for the recovery of costs, including travel-related expenses? Should courts compute the extent to which extraordinary costs in enforcing contractual rights are included in the consideration paid for the goods or services purchased?… It was perhaps just such [concerns] that, in part, moved the Supreme Court to pronounce costs and convenience “[are] not the test of reasonableness [of forum selection clauses].”
Questions and Comments
(1) Because Internet communications and services can appear in literally every state and nation in the world, and because of the potential jurisdictional and choice-of-law confusion arising from these ubiquitous contacts, it is easy to understand why the companies providing such services insist on forum-selection clauses. But the ubiquity of contacts related to these services also raises the question whether consumers should have to litigate claims arising around the world from their use of the services in a single forum, especially when the value of the claims are often much less than the cost of travel to the distant forum. How should courts resolve this tension? Does the framework from Carnival Cruise, reproduced supra page 722, apply straightforwardly to the Internet context? What are the relevant differences between the forum-selection clauses at issue in Carnival Cruise and the one at issue in America Online?
(2) In America Online, it is unclear whether plaintiffs affirmatively consented to the AOL clause, or merely ran their eyes over the paragraph containing the clause as they clicked through pages of legal notices. Does affirmative consent to the clause matter to its enforcement? When you visit Internet portals and Web sites, the sponsoring entity routinely places choice-of-law and/or choice-of-forum clauses in the “terms of service” provisions accessible via a link at the bottom of the site’s main page. Most users never actually view those terms. Should that matter for enforceability?
Recall the analysis in Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1997), discussed supra pages 728–729. A somewhat different view was expressed in Specht v. Netscape Communication Corp., 2001 U.S. Dist. LEXIS 2073 (2001), where the court held that an arbitration agreement contained in the unread License Agreement that accompanied downloaded Internet software was unenforceable. Compare Pollstar v. Gigmania Ltd., No. CIV-F-00-5671, 2000 WL 33266437 (E.D. Cal. 2000) (expressing concern about the enforceability of online “browse-wrap” license agreements).
What would happen to Internet activity if every user had to read and affirmatively consent to forum-selection clauses on every Web page visited?
(3) The real concern in America Online seems to be not forum selection, but rather governing law. Would the America Online court have enforced the forum-selection clause if AOL’s Terms of Service chose a Virginia forum but California governing law? In fact, such choices are relatively rare. A study of merger agreements showed that, depending on the state, somewhere between 70 and 95 percent of agreements that chose both a governing law and a jurisdiction for resolving disputes chose the same state for both. Eisenberg & Miller, Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements, 59 Vand. L. Rev. 1975, 2007 (2006). What does this suggest about the relationship between forum-selection clauses and choice-of-law clauses?
(4) America Online says the forum-selection clause must have “some logical connection to one of the parties or the dispute.” Compare Restatement (Second) Conflict of Laws §187(2)(a) (1971) (law chosen by parties governs unless “the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice”). Virginia is presumably such a logical choice because it is the headquarters of AOL and the location of most of AOL’s computer servers. In cases involving portals and related services that can be accessed on a worldwide basis, is every forum a logical choice? Is the defendant’s headquarters the only logical choice? Do criteria of “logical choice” and “substantial relationship” make sense as applied to the Internet?
(5) Many have proposed that the controversies that arise out of the Internet are best resolved not by courts, but by a variety of private dispute resolution mechanisms due to the worldwide nature of the activity and its common use by individuals and small entities. For a nice summary of this viewpoint, see Perritt, Dispute Resolution in Cyberspace: Demand for New Forms of ADR, 15 Ohio St. J. on Disp. Resol. 675, 676 (2000). We consider the enforceability of private arbitration clauses in the next section.
589 F.3d 821 (6th Cir. 2009)
Before: MERRITT, GIBBONS, and MCKEAGUE, Circuit Judges.
MCKEAGUE, J., delivered the opinion of the court.
Rose Wong and Patrick Gibson (together “plaintiffs”) filed a lawsuit on behalf of themselves and similarly situated Ohio residents against PartyGaming Ltd., a Gibraltar-based company which hosts online poker games. In the suit, plaintiffs alleged breach of contract, misrepresentation, and violation of Ohio consumer protection laws. PartyGaming moved to dismiss the suit pursuant to a forum selection clause in its terms and conditions, which plaintiffs had agreed to when they registered on the site. The forum selection clause specified that all disputes would be subject to the exclusive jurisdiction of the courts of Gibraltar. Plaintiffs appeal the district court’s dismissal of the suit sua sponte for forum non conveniens. For the following reasons, we affirm the decision of the district court.
PartyGaming runs an online poker business, which plaintiffs actively participated in as players. It is a publicly owned Gibraltar company, with its shares traded on the London Stock Exchange. To participate in online poker games, customers must register on PartyGaming’s website and agree to its “Terms and Conditions of Use.” Two such terms and conditions are relevant to this suit. The first relevant term contains PartyGaming’s anti-collusion policy, which states that customers are prohibited from holding more than one account and that PartyGaming is committed to preventing collusion and cheating. As part of its anti-collusion policy, PartyGaming also provides information on its website regarding a “Collusion Prevention System” used to identify and ban colluding players and detect multi-account players. The Terms and Conditions also provide that the agreement shall be governed by the laws of Gibraltar and any disputes shall be subject to the exclusive jurisdiction of the courts of Gibraltar. The first paragraph of the Terms and Conditions of Use contains the following warning: “IMPORTANT—PLEASE READ THESE TERMS AND CONDITIONS CAREFULLY BEFORE ACCEPTING THIS AGREEMENT, THEN PRINT THESE TERMS AND CONDITIONS AND STORE THEM.”
Plaintiffs … filed a diversity suit against PartyGaming in September 2006 in the Northern District of Ohio. The suit alleged that PartyGaming, through its anti-collusion policy, affirmatively represented that collusion and multi-account players did not occur on its website. The suit also claimed that PartyGaming affirmatively represented that it did not encourage gambling by minors or gambling addicts. Plaintiffs contended that these representations were false and, as such, violated Ohio consumer protection laws, breached the agreement, and negligently, recklessly, or intentionally induced plaintiffs to join the website. Plaintiffs sought certification of a class of all similarly situated individuals, which the district court provisionally certified, consisting of all persons in the state of Ohio who paid a registration fee on PartyGaming’s website.1
… PartyGaming … filed a motion to dismiss plaintiffs’… complaint. The motion claimed improper venue under Federal Rules of Civil Procedure (“FRCP”) 12(b)(3), due to the Gibraltar forum selection clause.…[T]he district court found the Gibraltar forum selection clause valid … and dismissed the action sua sponte for forum non conveniens.
To support its dismissal for forum non conveniens, the district court cited to the Gibraltar forum selection clause. Thus, as a threshold matter, we must determine whether the clause should be enforced. We review the enforceability of a forum selection clause de novo. In deciding this matter, we confront a choice-of-law issue of whether Ohio or federal law governs the inquiry into the enforceability of a forum selection clause when a federal court exercises diversity jurisdiction.
1. APPLICABLE LAW
To resolve this issue, we first look to the binding law of the Supreme Court and the law of this Circuit. In the context of admiralty cases, the Supreme Court has announced a federal policy favoring enforcement of forum selection clauses and has held that such clauses “should control absent a strong showing that [they] should be set aside.” [Shute, supra page 722; The Bremen, supra page 717]. The Court has also stated that federal law governs the inquiry when a federal court, sitting in diversity, evaluates a forum selection clause in the context of a 28 U.S.C. §1404(a) motion to transfer venue or in the context of any federal statute. Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22 (1988). The Court has provided guidance in these two contexts, but it has declined to decide the Erie issue of which law governs when a federal court, sitting in diversity, evaluates a forum selection clause in the absence of a controlling federal statute. Id. The Sixth Circuit has also declined to answer this question. In the past, we have noted that we did not need to decide the issue because both federal and state law treat forum selection clauses similarly. While our past decisions have maintained harmony between federal and state courts on the issue, a review of recent state cases reveals the possible emergence of differences in how state and federal law treat the enforcement of forum selection clauses. Ohio state courts have also noted the differences between federal and state law on the enforceability of forum selection clauses.
Because this Circuit has not affirmatively decided which law governs when a federal court sits in diversity, we look to the law of other Circuits for guidance. In deciding this issue, six Circuits have held that the enforceability of a forum selection clause implicates federal procedure and should therefore be governed by federal law.5 Both the Seventh and Tenth Circuits have held that the law which governs the contract as a whole also governs the enforceability of the forum selection clause. See, Abbott Labs. v. Takeda Pharms. Co., 476 F.3d 421, 423 (7th Cir. 2007) (“Simplicity argues for determining the validity … of a forum selection clause … by reference to the law of the jurisdiction whose law governs the rest of the contract.…”); Yavuz v. 61 MM, Ltd., 465 F.3d 418, 428 (10th Cir. 2006) (“We see no particular reason … why a forum-selection clause … should be singled out as a provision not to be interpreted in accordance with the law chosen by the contracting parties.”). The First Circuit has not affirmatively decided the issue. Finally, different panels in the Fourth Circuit have reached different results on the issue.
Given the possibility of diverging state and federal law on an issue of great economic consequence, the risk of inconsistent decisions in diversity cases, and the strong federal interest in procedural matters in federal court, we find persuasive the law used in the majority of circuits and now adopt it.…[F]orum selection clauses significantly implicate federal procedural issues. Further, while we recognize that we are not bound by the law of other Circuits, this court has also routinely looked to the majority position of other Circuits in resolving undecided issues of law. We therefore hold that in this diversity suit, the enforceability of the forum selection clause is governed by federal law. We now turn to the merits of the enforceability of the forum selection clause.
2. ENFORCEABILITY OF THE FORUM SELECTION CLAUSE
A forum selection clause should be upheld absent a strong showing that it should be set aside. Shute. When evaluating the enforceability of a forum selection clause, this court looks to the following factors: (1) whether the clause was obtained by fraud, duress, or other unconscionable means; (2) whether the designated forum would ineffectively or unfairly handle the suit; and (3) whether the designated forum would be so seriously inconvenient such that requiring the plaintiff to bring suit there would be unjust. The party opposing the forum selection clause bears the burden of showing that the clause should not be enforced.
Under the first factor, the party opposing the clause must show fraud in the inclusion of the clause itself. “General claims of fraud do not suffice to invalidate the forum selection clause.”[citation omitted.]…[P]laintiffs argue that the Gibraltar forum selection clause was obtained by fraud because PartyGaming falsely represented that collusion and multi-account players did not occur on its website. In advancing this claim, plaintiffs argue general fraud only, rather than fraud in the inclusion of the clause itself. Plaintiffs do not allege that PartyGaming falsely represented the chosen forum.… Nor do they contend that their agreement to the forum selection clause was obtained unknowingly or unwillingly. Thus, plaintiffs have not shown the clause to be unenforceable under the first prong.
Under the second factor, plaintiffs must show that a Gibraltar court would ineffectively or unfairly handle the suit. Different or less favorable foreign law or procedure alone does not satisfy this prong. Rather, the foreign law must be such that a risk exists that the litigants will be denied any remedy or will be treated unfairly. Under this prong, we have previously enforced forum selection clauses that specified an English forum, a German forum, and a Brazilian forum.…
In the present case, both parties agree that Gibraltar, as a British territory, is governed by English law. Plaintiffs contend that Gibraltar would not be an adequate forum because (1) Gibraltar does not allow jury trials and (2) Gibraltar does not allow class-action suits for damages. As to plaintiffs’ first claim, this argument ignores our precedent upholding an alternative forum even when jury trials were unavailable. Further, almost all non-U.S. forums would be inadequate under plaintiffs’ argument because few countries outside of the United States offer jury trials in civil cases. Finally, other Circuits have held that lack of jury trials does not render a forum inadequate. See, e.g., Rivera v. Centro Medico de Turabo, Inc., 575 F.3d 10, 23-24 (1st Cir. 2009); Lockman Found. v. Evangelical Alliance Mission, 930 F.2d 764, 768 (9th Cir. 1991). Thus, plaintiffs’ first argument lacks merit.
Turning to the second argument, plaintiffs offer a statement from an English lawyer and cite English case law to support their claim that Gibraltar does not allow class-action suits for damages. PartyGaming counters with its own expert statement and case citation, claiming that the suit could be maintained in class-action form. Fortunately, we need not decide whether a suit could be maintained in class form in Gibraltar because, even assuming that plaintiffs are correct, the unavailability of representative litigation would not render the forum ineffective. “The fact that parties will have to structure their case differently than if they were litigating in federal court is not a sufficient reason to defeat a forum selection clause.” Plaintiffs have not alleged that they could not bring the suit in Gibraltar, but only that they could not bring it in class form. Thus, they have not shown that Gibraltar would be an ineffective or unfair forum.
To meet the third prong of our test, the plaintiff must show that enforcement of the clause would be so inconvenient such that its enforcement would be unjust or unreasonable. This finding must be based on more than mere inconvenience of the party seeking to avoid the clause. We have previously held that enforcement of a forum selection clause would not be unreasonable where the opposing party failed to produce any evidence that it was exploited or unfairly treated. Further, the Supreme Court has held that a forum selection clause is not unreasonable simply because it appears in a non-negotiated consumer contract. Shute. In this case, plaintiffs are not sophisticated business entities with the ability to negotiate the forum, and continuing the suit in Gibraltar would no doubt be an inconvenience. Yet even with these considerations, plaintiffs have not carried their “heavy burden” of showing that enforcing this forum selection clause would be unjust or unreasonable. See id. Aside from their claims that a Gibraltar forum forecloses the possibility of a jury trial or class-action suit, plaintiffs have failed to show how litigating in Gibraltar would be such an inconvenient forum to yield it unjust or unreasonable. We therefore affirm the district court’s conclusion that the forum selection clause is enforceable. We now turn to the district court’s dismissal for forum non conveniens.
This court reviews a district court’s dismissal for forum non conveniens for an abuse of discretion. Forum non conveniens is a flexible doctrine. When a district court weighs the relevant factors, its decision deserves substantial deference. In weighing these factors, the district court must first establish an adequate alternative forum. Then, the court must weigh the relevant public and private factors. The court should also give deference to the plaintiff’s choice of home forum.
At the outset, we address the district court’s sua sponte dismissal for forum non conveniens. Plaintiffs argue that the dismissal amounted to an abuse of discretion because the district court raised forum non conveniens sua sponte. Plaintiffs claim that the district court was not properly briefed on the relevant forum non conveniens factors because the court was evaluating a motion to dismiss for improper venue under FRCP 12(b)(3), rather than a motion to dismiss for forum non conveniens.… The doctrine falls within the court’s inherent authority. So long as the district court has “facts relevant to the issue of forum non conveniens,” it can raise the doctrine on its own accord. In this case, the court had pending before it PartyGaming’s motion to dismiss for improper venue. Given that forum non conveniens is simply “a supervening venue provision,” facts relevant to the motion to dismiss for improper venue would also be relevant to the forum non conveniens analysis.… We now turn to the district court’s forum non conveniens analysis.
1. ADEQUATE ALTERNATIVE FORUM
Under the first part of the analysis, an adequate alternative forum must be identified. This requirement will be satisfied if the defendant is “amenable to process” in the foreign jurisdiction. Piper Aircraft Co. v. Reyno, 454 U.S. 235, 255 n. 22 (1981). An alternative forum is inadequate if “the remedy provided by [it] is so clearly inadequate or unsatisfactory that it is no remedy at all.” Id. Less favorable law in the alternative forum will not, on its own, make the forum inadequate. In this case, the district court determined that Gibraltar was an appropriate alternative forum. Plaintiffs argue that this finding was an abuse of discretion because (1) the district court did not determine whether PartyGaming was amenable to process in Gibraltar, and (2) the district court did not consider their claim that they could not maintain their suit in class form.…
… Plaintiffs … correctly note that the district court in this case did not make a specific finding on whether PartyGaming is amenable to process in Gibraltar. However, their argument fails to show an abuse of discretion because this case presents no real question of whether PartyGaming is amenable to process in Gibraltar. PartyGaming consented to submit itself to the jurisdiction of Gibraltar with the forum selection clause and, thus, is amenable to process there. Further, the district court found that PartyGaming is a Gibraltar corporation, with its principal place of business in Gibraltar. This finding also indicates that PartyGaming is amenable to process there. Thus, plaintiffs have failed to show an abuse of discretion on this issue.
In their second claim, plaintiffs argue that the district court abused its discretion by failing to consider their expert’s opinion that they could not maintain a class-action suit in Gibraltar. While the district court did not make a specific finding on plaintiffs’ expert, it did acknowledge, and ultimately rejected, plaintiffs’ claim that they could not bring the suit in class form. Further, even assuming that plaintiffs correctly characterize Gibraltar law, the inability to bring a class suit would not render Gibraltar an inadequate alternative forum. In Piper Aircraft, the Supreme Court noted that the alternative forum had to be so inadequate such that “no remedy at all” was available. “[D]ismissal on the grounds of forum non conveniens may be granted even though the law applicable in the alternative forum is less favorable to the plaintiff’s chance of recovery.” Id. Thus, the district court did not abuse its discretion in finding Gibraltar to be an adequate alternative forum.
2. PUBLIC FACTORS
After the district court determines that an adequate alternative forum exists, it must weigh the relevant public and private factors in favor of a different forum. The public factors include court congestion, local interest in the matter, interest in having the trial at home with the law that governs, avoidance of conflict-of-law problems or application of foreign law, and unfairness in burdening local citizens with jury duty. In this case, the district court found that public factors weighed in favor of a Gibraltar trial because PartyGaming is a Gibraltar company, whose operations might be greatly affected by the suit, and other Gibraltar gaming companies might be affected by the suit. The district court further found that Gibraltar law would govern the suit, due to the choice-of-law clause, and Gibraltar had an interest in hearing “a case involving a substantial player in [its] comparatively small economy.”
In claiming an abuse of discretion, plaintiffs cite Ohio’s interest in having its consumer protection laws enforced and claim that the district court did not separately analyze the choice-of-law provision to determine its enforceability. While Ohio might have an interest in this matter, this court has held, and the district court noted, that when state law conflicts with a forum selection clause, the court should not categorically uphold the state policy over the clause.… Further, Ohio has no interest in the laws of the twenty-three other states over which plaintiffs seek class certification. But Gibraltar would have an interest over the entire suit.
In their second argument, plaintiffs claim that the district court abused its discretion by finding that Gibraltar law governs without separately evaluating the enforceability of the choice-of-law clause under Ohio law. Plaintiffs argued in the district court that the Gibraltar choice-of-law provision was not enforceable because Ohio has significantly greater interest in the case. In response, the district court simply stated “it is clear from the governing law clause that Gibraltar law should be applied.” To begin with, it is not clear from our case law whether the district court was required to separately conduct a choice-of-law analysis for forum non conveniens purposes.
Further, the choice-of-law clause was only one public factor advanced by the district court for its decision. The court’s decision is also supported by its finding that Gibraltar has an interest in the litigation. See Piper Aircraft (noting that other public interest factors weighed in favor of a Scotland trial even if the district court improperly found Scottish law applied). Finally, plaintiff’s argument that Ohio has a significantly greater interest in the matter would not, on its own, render the choice-of-law provision unenforceable. Thus, we conclude that the district court did not abuse its discretion in finding that public factors weigh in favor of a Gibraltar forum.
3. PRIVATE FACTORS
In weighing private factors, the district court should consider the ease of access to evidence, ability to obtain witness attendance, and practical problems such as ease, expeditiousness, and expense. In this case, the district court found that private factors weighed in favor of a Gibraltar forum because relevant evidence and witnesses would be located there. The court further found that plaintiffs would not encounter many obstacles litigating in Gibraltar. Finally, the district court advanced the forum selection clause as a private factor weighing in favor of a Gibraltar forum. Plaintiffs claim that this was an abuse of discretion because nothing in the record indicates that relevant witnesses and documents are located in Gibraltar and modern technology makes close proximity to evidence unnecessary. We agree with plaintiffs that the district court was not fully briefed on the location of possible evidence and witnesses. However, this represented only one factor used by the district court in its determination that private factors weighed in favor of a Gibraltar forum. Even if the district court erred in this finding, the Gibraltar forum selection clause weighs strongly as a private factor given our policy favoring enforcement of these clauses. See The Bremen. Thus, we conclude that the district court did not abuse its discretion in finding that private factors weigh in favor of Gibraltar.
4. DEFERENCE TO PLAINTIFFS’ CHOICE OF FORUM
Finally, plaintiffs argue that the district court abused its discretion because it did not give proper deference to their choice of a home forum.… While deference should be afforded to a U.S. plaintiff’s choice of home forum, choice of home forum is not a dispositive issue.… When dismissing for forum non conveniens pursuant to a forum selection clause, federal courts have generally given less deference to a plaintiff’s choice of home forum. See, e.g., Evolution Online Sys., Inc. v. Koninklijke PTT Nederland N.V., 145 F.3d 505, 511 (2d Cir. 1998) (“[T]he district court would begin its forum non conveniens assessment of Gulf Oil factors with a level set of balances, rather than one weighted heavily in favor of plaintiff’s choice of forum.”); Jumara v. State Farm Ins. Co., 55 F.3d 873, 880 (3d Cir. 1995) (“[W]hile courts normally defer to a plaintiff’s choice of forum, such deference is inappropriate where the plaintiff has already freely contractually chosen an appropriate venue.”); In re Ricoh Corp., 870 F.2d 570, 573 (11th Cir. 1989) (“[W]e see no reason why a court should accord deference to the forum in which the plaintiff filed its action.”). Thus, the district court did not abuse its discretion by not giving deference to plaintiffs’ choice of home forum.
For the foregoing reasons, we affirm the decision of the district court.
MERRITT, J., concurring.
I concur in much of the reasoning of the court, if we look at the problem in a purely legalistic way. But for me the most important considerations are not the splits in the circuits or the ambiguities inherit in the existing law on forum selection clauses, but rather the fact that the gambling contract entered into between the parties here is likely illegal in Ohio but completely legal in Gibraltar. If we read Ohio law as controlling the contract in question, the parties probably are guilty of a crime under Ohio law, the contract is void, and both parties could be extradited and prosecuted together in an Ohio criminal court.1
Surely the parties assumed that if the plaintiff won at gambling, the plaintiff would get some money and if the plaintiff lost, the winner and the house would split the winnings. So when the plaintiff comes into court and says he wants money in an Ohio court under what he regards as an Ohio contract, but does not want the Ohio court to say that under the governing Ohio law the gambling contract is illegal, the plaintiff is a bit inconsistent in his logic, to say the least.
This illegality factor is particularly salient because the defendant now reports that it has completely stopped carrying on its online gambling business in Ohio and in the United States because Congress recently passed a criminal statute outlawing this kind of internet gambling. See Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006, 31 U.S.C. §§5361-5367 (effective October 13, 2006).
Obviously, neither the plaintiff nor the defendant’s employees want to go to jail in Ohio. On a principle analogous to the rule of lenity I would interpret the forum selection clause as controlled by English law which, so far as I can tell, is the only way to keep the contract from being void and subject to criminal penalties. It also reduces the risk that the plaintiff and others will go to jail under Ohio law or even under the Federal Wire Act or RICO.3
Now, of course, the parties have not raised this point. Neither wants to admit the existence of any criminal law problem with their activities. But sometimes courts have to raise embarrassing questions that both parties to litigation had rather we overlooked.
Questions and Comments
(1) The America Online and Wong courts come to dramatically different conclusions regarding the reasonableness of the forum-selection clauses in consumer contracts entered into online. What accounts for these different attitudes? Does Judge Merritt’s concurrence help provide an answer?
(2) How much difference must there be between forum law and procedure and the chosen law and procedure before a court justifiably refuses to enforce a forum-selection clause? Must it be impossible for the plaintiff to bring a viable claim in the chosen forum before the court strikes the clause? The America Online and Wong courts appear to answer this question differently. Should this analysis turn on whether the contract involves consumers or two sophisticated contracting parties? On the likelihood that the complaining party actually saw the forum-selection clause? On something else?
(3) Might the difference in court attitude toward the forum-selection clauses have anything to do with the fact that America Online involved an interstate case where most states permit class actions and Virginia is an outlier, whereas Wong involved an international case and most other nations do not provide plaintiffs with such a device? The same can be said for jury availability. Within the U.S. jury trials are possible virtually everywhere, but outside the U.S. they are much less common. Punitive damages are also more readily available within the United States than without.
(4) Should state or federal law apply to the enforcement of forum-selection clauses in diversity cases? As the Wong court notes, there is near consensus across the federal circuits that forum-selection clauses are procedural and therefore federal law applies to their enforcement. The conclusion seems to fly in the face of Erie, however, because very often the outcome of the case is significantly affected by where the litigation occurs. Moreover, at least one of the parties cared about the issue enough to attempt to resolve it in the contract, which suggests that they thought the matter substantial (is this the same thing?). Finally, the disparate treatment between state and federal courts generates strong motivation for defendants seeking forum-selection clause enforcement to remove cases to federal court because disparities virtually always take the form of lesser enforcement in the state courts. On the other hand, federal court enforcement helps to enhance the U.S. position in international commerce, a concern of the Supreme Court’s expressed in The Bremen. The Supreme Court’s role in promoting international trade opportunities is further discussed in the next section.
In Atlantic Marine Const. Co. v. U.S. Dist. Ct. for the Western Dist. of Texas, 134 S. Ct. 568 (2013), the Supreme Court confirmed that forum non conveniens was the correct vehicle for the district courts when considering whether to dismiss an action in deference to a forum selection clause choosing a state or foreign court. This conclusion helped justify the use of §1404(a) as the vehicle for considering whether to transfer a case to another federal court in deference to a forum selection clause. Specifically, because §1404(a) codifies the forum non conveniens factors to be used when considering transfers, it would enable a substantially similar analysis across cases involving forum selection clauses. Id. at 580. The Court did not specifically state whether state or federal forum non conveniens principles would apply, but its analysis seemed to assume the application of the federal doctrine. This topic and its relation to Erie is further discussed in chapter 6.
(5) Why does the Wong court include an extended discussion of forum non conveniens? Couldn’t the court simply dismiss the case once it determined that the forum-selection clause was enforceable? As discussed in chapter 6, the Supreme Court cases treating the question of enforcement of choice-of-court clauses in diversity cases in federal courts have all focused on forum non conveniens-type analysis. The analysis enables the federal courts to treat the enforcement question as essentially procedural, justifying displacement of state law principles. The enforcement analysis used in state courts, by contrast, tends to focus on contract law principles, which are clearly substantive. Is the forum non conveniens analysis an equally effective tool for the job?
(6) Sometimes plaintiff files suit in the forum exclusively chosen in the contract and the defendant argues that the court should nevertheless dismiss the case on grounds of forum non conveniens. Should an otherwise enforceable clause preclude forum non conveniens dismissal from the chosen forum? Several courts have held to the contrary, deciding that the public interest and third-party private interest factors cannot be waived by the contracting parties. See Heiser, The Hague Convention on Choice of Court Agreements: The Impact on Forum Non Conveniens, Transfer of Venue, Removal, and Recognition of Judgments in United States Courts, 31 U. Pa. J. Intl. L. 1013, nn.31-34 and accompanying text (2010) (discussing cases).
(7) We saw in the choice-of-law clause section a willingness on the part of some courts to enforce choice-of-law clauses even in the face of state statutes prohibiting evasion of local law with a forum-selection clause. The reverse can be true too: Sometimes courts enforce forum-selection clauses even though state statutes forbid evasion of local law with choice-of-law clauses. Consider, for example, Rafael Rodriguez Barril v. Conbraco Industries, Inc., 619 F.3d 90 (1st Cir. 2010), a case in which a Puerto Rican sales representative of a North Carolina company brought suit in Puerto Rico Superior Court for wrongful termination but the defendant company removed the case to federal court and then obtained enforcement of a forum-selection clause that provided for resolution of disputes exclusively in North Carolina state or federal courts. Plaintiff opposed enforcement of the clause on grounds that a state law protecting sales representatives from termination stated explicitly that sales representative contracts are governed by Puerto Rico law and that contrary contract provisions are “null.” The court concluded that this was a prohibition on the use of contrary choice-of-law provisions only and that the use of forum-selection clauses could have been but was not addressed by the legislature. The court advised plaintiff to bring his public policy argument to the attention of the North Carolina court.
Similarly, a forum-selection clause designating Florida courts for dispute resolution was enforced by the Texas courts in a case brought by an employer against a former Texas employee based on a noncompete clause in the employment contract. In re Autonation, Inc., 228 S.W.3d 663 (Tex. 2007). Plaintiff argued against enforcement of the forum-selection clause by pointing out that the Texas courts had previously refused to enforce choice-of-law clauses in noncompete agreements, reasoning that such provisions violated Texas public policy. The court distinguished the two situations, stating that while it was permissible for Texas courts to insist on applying Texas law to cases litigated in its courts, demanding that all litigation occur in local courts was more problematic. A concurring judge reasoned that enforcing the forum-selection clause was justified only because it left open the possibility that Florida courts might uphold Texas public policy.
Is it credible that when a court or legislature closes off one means of escaping from local laws it intends to leave the door open for escape through other means? If courts are to engage in this reasoning, does it make more sense to uphold choice-of-court clauses on the theory that other courts might uphold local public policy than to uphold choice-of-law clauses, where circumvention of local policy is certain? In fact, courts do seem more willing to enforce choice-of-court clauses than choice-of-law clauses. O’Hara & Ribstein, The Law Market 71-73 (2009) (discussing state incentives).