Are State Courts Biased Against Foreign Forum Selection Clauses? A Look at the Data.
June 5, 2023
In a prior post, I discussed some data on the practice of state and federal courts in the United States relating to the enforcement of forum selection clauses. This dataset also provides a useful opportunity to determine whether state courts are more likely to enforce a clause selecting another U.S. court than they are to enforce a clause selecting a foreign court. A review of the relevant cases suggest that state courts are not, in fact, biased against foreign forum selection clauses.
The Data
With an assist from Katie Richardson, I assembled a dataset of 340 published and unpublished state cases decided between 2010 and 2020 where the court considered the enforceability of a forum selection clause. There were 300 clauses in the dataset that selected a court in another U.S. jurisdiction. The enforcement rate for these clauses was 77%. There were 40 clauses in the dataset that selected a court in a foreign country. The enforcement rate for these clauses was 93%. The enforcement rates were calculated by dividing (1) the total number of cases where a clause was enforced by (2) the total number of cases where the court considered the issue of enforceability.
These results are surprising. One would expect state courts to trust other U.S. courts more than foreign courts and therefore to be more willing to send cases to other U.S. states than to foreign countries. In fact, state courts enforce foreign clauses at a higher rate than domestic clauses. To explain this disparity, it is helpful to examine why state courts sometimes refuse to enforce forum selection clauses.
Bases for Non-Enforcement
The first basis for non-enforcement is statutory. Every state has laws on the books that invalidate forum selection clauses in certain types of contracts. Most states have also enacted statutes that direct state courts not to enforce a clause when enforcement will lead to the waiver of non-waivable statutory rights. The second basis for non-enforcement sounds in the common law. State courts will not enforce a forum selection clause when enforcement would be “unreasonable” under the circumstances. A clause may be deemed unreasonable when enforcement would result in duplicative litigation, when the plaintiff was never provided with notice of the clause, or when the chosen forum lacks any relationship to the parties, among other reasons.
The disparity in enforcement rates described above is largely attributable to the fact that the “typical” state case involving a foreign forum selection clause is less likely to trigger one of the statutory or common-law bases for non-enforcement than the “typical” state case involving a domestic clause.
Consider state invalidating statutes. The most common version of these laws directs courts not to enforce a clause when it appears in a construction contract relating to property in the enacting state. There were no cases in the dataset where a foreign company entered into such a contract. There were, however, several cases where a state court refused to enforce a forum selection clause in a wholly domestic construction contract. The overall effect is to lower the enforcement rate for domestic clauses relative to their foreign counterparts.
Or consider statutes that contain so-called “anti-waiver” provisions. Anti-waiver provisions are commonly written into statutes intended to protect the rights of consumers. It is much more likely for a consumer in the United States to enter into a consumer transaction with a domestic company than a foreign company. Should the matter wind up in litigation, it is therefore much more likely that a domestic forum selection clause will run afoul of an anti-waiver provision. The end result, again, is a lower enforcement rate for domestic clauses.
It is easy to imagine an alternative universe where this disparity disappears. Seven states have laws on the books directing their courts not to enforce forum selection clauses selecting foreign courts when there is reason to believe that those courts will apply foreign laws that are inconsistent with rights vouchsafed by the state and federal constitutions. All of these laws arose out of the anti-Sharia law movement in the United States. The laws are, however, virtually never litigated because the enacting states — Alabama, Arkansas, Kansas, Louisiana, North Carolina, Oklahoma, and Tennessee — rarely have contacts with Arab countries. If this were to change, then the enforcement rate for foreign clauses may decline in these states because the invalidating laws, as drafted, apply exclusively to foreign forum selection clauses. As things currently stand, however, these laws are rarely (if ever) the object of judicial decisions.
Cases Where a Foreign Clause Was Not Enforced
In three state cases decided between 2010 and 2020, a state court declined to enforce a forum selection clause choosing the courts in a foreign country. A look at these cases confirms that state courts are treating foreign forum selection clauses the same way they treat domestic clauses.
Fraud
In Marcal Finance SA v. Sutton, the plaintiffs were a 94-year-old mother and her daughters. The defendants were the plaintiffs’ former investment advisors, lawyers, and fiduciaries. The plaintiffs sued the defendants for fraud in New York state court. The defendants moved to dismiss based on a forum selection clause in a trust agreement selecting the courts of Switzerland. The plaintiffs told the court that they had never seen the trust agreement in question. They explained that one of the defendants had asked them to sign a blank piece of paper to set up a bank account and that the defendant thereafter transferred their signatures from that paper to the trust agreement without their knowledge or consent. Based on these allegations, the court held that the agreement the agreement was so “permeated with fraud” as to render the Swiss forum selection clause unenforceable.
This decision is consistent with other decisions by the New York state courts invalidating purely domestic forum selection clauses in situations when the plaintiff has plausibly alleged that the agreement was permeated with fraud.
Child Custody
In Matter of Eldad LL v. Dannai MM, two unmarried Israeli nationals decided to have a child together and entered into a parenting agreement. That contract contained a forum selection clause stating that the “Family Court in [Israel would] have sole jurisdiction to judge any matter involving or resulting from the agreement.” After the child was born in New York, the father petitioned for custody in New York state court. The mother argued that the forum selection clause required any such suit to be brought in Israel. The New York Appellate Division disagreed. Since the child had never lived anywhere but New York, it reasoned, the family court had jurisdiction to resolve the dispute irrespective of the forum selection clause selecting the courts of Israel.
This decision is consistent with other decisions where U.S. courts ignored forum selection clauses in custody agreements concluded between parents in purely domestic cases. It also consistent with the official comments to Section 201 of the Uniform Child Custody Jurisdiction and Enforcement Act.
Employment Discrimination
In Acharya v. Microsoft Corporation, the plaintiff was a woman who worked for the Microsoft Corporation (Microsoft) in Washington for sixteen years. In 2008, she resigned her position at Microsoft to accept a position with one of that company’s foreign subsidiaries – Microsoft Global Resources GmbH (MGR) – and relocated to London. The plaintiff’s new employment contract contained a choice-of-law clause choosing Swiss law and a forum selection clause choosing the courts of Switzerland. After the plaintiff’s supervisor in London allegedly discriminated against her because of her gender, and after Microsoft refused to consider her for any positions back in Washington, she brought an employment discrimination suit in Washington state court under the Washington Law Against Discrimination (WLAD). Microsoft moved to dismiss based on the Swiss forum selection clause. The court denied the motion. It court held that it would contravene Washington public policy to require the plaintiff to litigate in Switzerland because Swiss law did not provide protections against discrimination that were equivalent to the WLAD. If the forum selection clause were enforced, the court reasoned, it would result in the waiver of rights that were non-waivable under Washington law. The only way to avoid this outcome was to decline to give effect to the clause.
Other U.S. courts have reached similar decisions in purely domestic cases.
Conclusion
State courts in the United States do not treat foreign forum selection clauses differently than purely domestic clauses. Although the raw data suggest that foreign clauses are actually enforced at a higher rate than domestic clauses, this disparity is attributable to the fact that the statutory and common-law bases for invalidation are more often triggered in wholly domestic cases. There is evidence that some state legislatures in the United States are hostile to foreign clauses in cases that involve fundamental constitutional rights. To date, however, there has been virtually no litigation involving the statutes announcing this hostility. There is, finally, nothing in the recent cases declining to enforce foreign clauses suggesting that these clauses were treated any differently than domestic clauses.