Contracting for U.S. Courts in Transnational Commercial Litigation

Among the most important provisions that litigators search for once alerted of a potential dispute are forum selection clauses embedded in a large number of modern commercial contracts. Over the past several decades, state legislators and the U.S. Supreme Court have increasingly enabled parties to litigate in U.S. courts, even for lawsuits with significant “foreign” elements — so long as they include a contractual provision agreeing to litigate in U.S. courts. Last week, John Coyle called for Congress or the U.S. Supreme Court to consider more directly when inbound forum selection clauses should be enforced.

Underneath this seemingly innocuous contract clause lie both thorny intellectual questions and important policy considerations. Doctrinally, what source of law governs the interpretation of forum selection clauses, and when should these clauses be enforced? Policy-wise, are there considerations — other than simply deferring to the purported will of the contracting parties — that ought to be considered? This post lays out some competing policy considerations. 

The Virtues of Enforcing Inbound Forum Selection Clauses

The conventional wisdom suggests that courts ought to enforce forum selection clauses to respect the autonomy of contracting parties. But there are other important considerations at play. One virtue of enabling parties to litigate in U.S. courts is that it tends to allow judges with particular expertise to adjudicate particular kinds of disputes. Consider the forum selection clause highlighted in a recent case before the U.S. District Court for the District of Delaware, between an American biopharmaceutical company and a Japanese pharmaceutical company:

[T]he Parties agree that all Potential Actions arising under U.S. law relating to patent infringement or invalidity, and filed within two (2) years of the end of the Covenant Term, shall be filed in the United States District Court for the District of Delaware and that neither Party will contest personal jurisdiction or venue in the District of Delaware and that neither Party will seek to transfer the Potential Actions on the ground of forum non conveniens.

The choice to resolve disputes in Delaware is not a coincidence. While Delaware’s state courts have long enjoyed pre-eminence for adjudicating high-stakes corporate law matters, the state’s federal judges have also earned a well-deserved reputation it comes to litigating “complex intellectual property and commercial disputes.”

Delaware is not alone. The docket of the Southern District of New York (SDNY), for instance, is full of cases that end up in Manhattan as a result of parties preferring to litigate before New York federal judges who tend to develop expertise from routinely presiding over complex business disputes. It does not hurt that judges in the SDNY have also built a reputation for the speedy disposition of cases. Colloquially referred to as a “rocket docket,” a number of SDNY judges impose case management orders which generally require fact discovery to be completed within 120 days following the initial pretrial conference. The assurance that any given dispute will be adjudicated by a judge with some level of expertise in a subject matter — and done so on a relatively swift basis — is valuable to business entities contracting for cross-border commercial and financial arrangements. The fact that certain federal courts can build a reputation for resolving certain disputes — and be rewarded in the form of drawing more high-profile commercial disputes — may also have positive spillover effects.

Another virtue of embracing inbound forum selection clauses is that it may prevent cases involving the public interest of the United States from being funneled to arbitration. Federal courts declining to enforce forum selection clauses selecting U.S. courts do not make disputes disappear into thin air. In some respects, our federal and state courts — like it or not — are locked in competition with leading arbitral institutions to serve as dispute resolution bodies. To the extent that Congress or the Supreme Court of the United States injects uncertainty as to whether forum selection clauses selecting U.S. courts are enforceable, that may induce more contracting parties to select arbitration as their exclusive forum. From that standpoint, there might be some relief when federal judges — rather than arbitrators adhering to hallmark principles of privacy and confidentiality — hear transnational commercial disputes that often implicate claims laden with important public interests.

Indeed, disputes arising out of modern contracts often involve not just contractual claims, but also tort claims and other statutory claims. Forum selection clauses are often used in tandem with choice of law clauses mandating the application of a particular source of law that may preclude the enforcement of otherwise viable federal statutory claims — including the Sherman Act, the RICO Act, and the Age Discrimination in Employment Act. Federal courts, rather than arbitrators, are at least theoretically more likely to police parties from eviscerating otherwise viable federal regulatory claims. Relatedly, more cases litigated in federal courts (rather than arbitration) also mean more case law — enhancing predictability in the law and perhaps promoting certain public values.

The Perils of Enforcing Inbound Forum Selection Clauses

Several words of caution are in order. Jurisprudence encouraging the rigorous enforcement of forum selection clauses is not a policy choice without costs. For one, both state and federal courts are busy. Super busy. The sheer growth in the number of cases brought in federal courts has far outpaced the growth in the number of federal judges. Notwithstanding heroic efforts by senior judges taking on a large number of cases, the potential proliferation of transnational disputes in federal court attributable to forum selection clauses necessarily imposes an opportunity cost of time for the judges and their clerks who must shave time away from cases of domestic significance. Indeed, many federal judges are reportedly dealing with “crushing caseloads” and have declared a “judicial emergency” with the rising number of cases. Therefore, increases in transnational commercial cases attributable to inbound forum selection clauses ought to be met by Congress increasing the number of permanent judgeships in jurisdictions that are becoming hotbeds of transnational litigation.

Rigorously enforcing inbound forum selection clauses may also come at the cost of penalizing weaker parties in contracts who do not (and often cannot) negotiate over the terms of the agreement. In cases of adhesion contracts, forum selection clauses often come at the cost of penalizing weaker parties to non-negotiable agreements — including consumers or employees. It need not be this way. As John Coyle and Katherine Richardson have observed, “it is unfair to enforce a contract provision that requires the weaker party to travel thousands of miles to defend himself in a lawsuit brought by the stronger party when the provision appears in a take-it-or-leave-it agreement drafted by the stronger party.”

Conclusion

No short commentary can fully excavate the complex and at times elusive policy considerations at play when it comes to the enforcement of forum selection clauses. At the very least, it is my hope that more scholarly attention is brought to this important topic to better understand the competing policy considerations at play.