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Forum Selection Clauses

By: Brittany Ogden

The U.S. Supreme Court started the sea change to acceptance in 1972 with the case of M/S Bremen v. Zapata Off-Shore Co. In that case, the Supreme Court stated its belief that in trial courts sitting in admiralty, “such clauses are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances.” The Court went on to say that it is the correct approach to “enforce the forum clause specifically unless [the party who filed counter to the clause] could clearly show that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.”

Generally, a forum selection clause will be valid unless the party objecting to its enforcement establishes (1) that it is the result of fraud or overreaching, (2) that enforcement would violate a strong public policy, or (3) that enforcement would result in litigation in a jurisdiction so seriously inconvenient as to be unreasonable. The party seeking to avoid the forum selection clause has the burden of proving that it is unenforceable.

Each state follows this lead, but each sets forth the standards slightly differently. For example, in 2009, the Minnesota Court of Appeals in C.H. Robinson Worldwide, Inc. v. FLS Transportation, Inc. stated that a forum selection clause will not be disturbed unless the clause is “so unreasonable that its enforcement would be clearly erroneous and against both logic and the facts on record.” Whereas the Court of Appeals of its next door neighbor, Wisconsin, stated in Converting/Biophile Laboratores, Inc. v. Ludlow Composites Corp. that there is a “strong presumption favoring venue in that forum, unless enforcement is shown to be unreasonable under the circumstances. However, where a forum-selection clause is deemed to be unconscionable or a violation of public policy, we have declared it unreasonable and have refused to enforce it.”

Fraud and Overreaching

There is some ambiguity as to the precise boundaries of what constitutes “overreaching” with the First Circuit declaring it a “a nebulous concept at best” in Rivera v. Centro Médico de Turabo, Inc. Black's Law Dictionary defines “overreaching” as “that which results from an inequality of bargaining power or other circumstances in which there is an absence of meaningful choice on the part of one of the parties.” But courts have stated that the mere fact of inequality between the parties is not enough to render an agreement unenforceable nor is a lack of an ability to negotiate. There must be some evidence that the party has exploited their bargaining power. The relative disparity in the bargaining positions of the parties or the fact that the clause is part of a “boilerplate” provision is not enough alone to be considered overreaching. There needs to be something more that pushes it such that the bargaining power is exploited in a way that is overweening and the courts will not tolerate. There must be undue influence.

Public Policy

If enforcement of a forum selection clause would contravene a strong public policy of the forum in which it is brought, whether by statute or judicial decision, the clause is not enforced. An example of public policy overriding the forum selection clause occurred in the 2004 Wisconsin case of Beilfuss v. Huffy Corp., which involved the enforcement of a covenant not to compete. In that case, the Wisconsin Court of Appeals stated that they “pay close attention to public policy considerations.” The Court of Appeals held that the “choice of law provision is unenforceable because it violates Wisconsin’s long-standing public policy controlling covenants not to compete, in that Wisconsin does not permit severability as a matter of public policy, while Ohio does. Moreover, we hold that because important public policy considerations are involved, it is unreasonable to enforce the forum selection provision.”

Inconvenient Venue

An inconvenient venue must be such that it is seriously inconvenient. The U.S. Supreme Court in M/S Bremen pointed out that “[o]f 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.” The Court suggested that it might be considered inconvenient if the agreement was “between two Americans to resolve their essentially local disputes in a remote alien forum. In such a case, the serious inconvenience of the contracted forum to one or both of the parties might carry greater weight in determine the reasonableness of the forum clause.” The Court goes on to point out that “even there the party claiming should bear a heavy burden of proof.”

Example of a Forum Selection Analysis

In Pietroske, Inc. v. Globalcom, Inc., an owner of a Wisconsin car dealership, entered into a contract with Globalcom, Inc. for telephone services. The contract was described as follows:

The contract, prepared by Globalcom, is a one-sheet standard form contract or service agreement; the front side is a series of sections with fill-in-the-blanks to gather specific information on the services Globalcom will provide to the buyer. At the bottom of the front side is “Section 9 Customer Authorization,” which contains the following language immediately above the customer’s signature: “The customer understands and agrees that all of Globalcom® services are provided under… the terms and conditions set forth on the reverse side of this form.” The reverse side is two columns, in one size typeface, and contains general terms of the service agreement, including guarantee, cancellation / default, interruption of service, payment and billing, and liability. The last two sentences of the paragraph “g” of cancellation / default provide: “Customer agrees that all disputes will be under the laws of the State of Illinois. Venue shall be in Cook County, Illinois.” (emphasis in original).

Three years later, the car dealership owner commenced an action against Globalcom alleging breach of contract, strict responsibility and negligent misrepresentation. Globalcom responded with an answer and a motion to enforce the forum-selection clause. The owner argued that the contract was unconscionable and the forum-selection should not be enforced because: (i) the clause was not specifically pointed out to him; and, (ii) he did not read the agreement before he signed it.

The Wisconsin appellate court upheld and enforced the forum-selection clause. It concluded that there was no substantive unconscionability in the forum-selection clause, finding it reasonable that Globalcom would select its headquarters’ city (Chicago) as the forum of choice in its contract. All of Globalcom’s records and employee-witnesses would be located in Cook County, Illinois. The court determined that the owner, signatory on the contract, would be the only employee of the car dealership to testify, and, therefore, there would be no major personnel or financial impact on the dealership.

The court distinguished the Pietroske facts from Leasefirst v. Hartford Rexall Drugs, Inc., a case where the court decided not to enforce the forum-selection clause in a lease arrangement. In Leasefirst, the forum-selection clause allowed Leasefirst the exclusive right to select as a forum any state where it did business versus the purposeful selection of a single state as a forum.

Unlike the Leasefirst and other similar cases, the identities of the parties involved in the transaction in Pietroske were revealed. Further, the forum-selection clause was in the same print as all of the terms on the page. The court also noted that the contract was only one-page, front and back. The court pointed out that “[t]he terms and conditions on the reverse side are not lengthy and come close to being in plain English.”

Parting Thoughts

Even though each state sets out its own approach to the standards, one general lesson can be gleaned from the cases. When depending upon a forum selection clause, or any contract term, a leasing company should be certain that the forum selection clause and the company’s identity are clearly and plainly presented in the lease documentation to the lessee prior to the execution. And, direct communication and document exchanged between the leasing company and the lessee can prove beneficial when faced with any attack of the contract terms.

Brittany S. Ogden is an attorney and shareholder with the law firm of Murphy Desmond S.C. located in Madison, Wisconsin. She concentrates her legal practice in business and commercial litigation as well as bankruptcy and creditors’ rights matters. She has ten years of experience with financial leasing matters, representing companies in state and federal disputes concerning the enforcement of lease agreements. In addition to successfully defending challenges to lease terms, she regularly pursues fraud claims against customers on behalf of numerous regional and national financial institutions. Brittany obtained her undergraduate degree from the University of Wisconsin-Madison in 1996, and graduated from the Syracuse University College of Law in 1999. She received the “Rising Star” award in the area of Business Litigation by Wisconsin Super Lawyers in 2006, 2007, 2008 and 2009. She is a member of the Lease Enforcement Attorney Network (LEAN) as well as the Equipment Leasing and Finance Association (ELFA). She is admitted to practice in the State of New York, the State of Wisconsin, the U.S. District Court for the Northern District of New York, and the U.S. District Court for the Eastern and Western Districts of Wisconsin. She is a member of the American Bar Association (ABA), American Bankruptcy Institute (ABI) and James E. Doyle American Inns of Court. She also serves as the president of the board for MAGNET (Madison’s non-profit professional organization) and a board member for the Legal Association for Women in Dane County, Wisconsin. Besides the law practice, Brittany enjoys spending time chasing her two year old boy, running on her family’s farm or finding the perfect shoe with friends in NYC.