Sisyphus and Forum Selection Clauses
November 27, 2024
Image by Xavier Turpain from Pixabay
In Greek mythology, Sisyphus was fated to push a boulder up an endless hill for all eternity. No matter how long he pushed, he and the boulder would never reach the top. I sometimes feel this way when I write about forum selection clauses. I research and blog about these provisions (a lot). I make reasonable arguments about how certain issues should be addressed. And yet nothing ever seems to change. A recent decision by a federal court in North Carolina is a case in point.
Facts
The plaintiff in Flahive v. Vonq, Inc., was Jonathan Flahive, a North Carolina resident. The defendants were Vonq, Inc., a corporation organized and existing under the laws of the State of Delaware, and Vonq Group, B.V., corporation organized and existing under the laws of the Netherlands.
In 2021, Flahive entered into a consultancy agreement with the Vonq Group. The agreement called for him to work as a “Senior Vice President” out of his home office in Raleigh. After the company allegedly refused to pay him hundreds of thousands of dollars in commissions and bonuses, Flahive filed a Complaint with the North Carolina Department of Labor in 2023. The Department of Labor issued a Right-to-Sue with Merit letter in early 2024. Flahive brought a lawsuit against Vonq and the Vonq Group in federal court in North Carolina in June 2024. A few months later, the defendants moved to dismiss for forum non conveniens on the grounds that the consultancy agreement contained an exclusive forum selection clause that required all litigation to be conducted in the Netherlands.
Erie and State Law
The North Carolina legislature has enacted a statute, N.C. Gen. Stat.§ 22B-3, which provides that forum selection clauses choosing the courts of another jurisdiction are generally unenforceable if the contract is made in North Carolina. If Flahive had brought his lawsuit in state court, there is no doubt that that court would have refused to enforce the clause because the consultancy agreement was made in North Carolina. The case was, however, brought in federal court.
In theory, the federal courts sitting in diversity should reach the same result as the state courts in the state in which they sit. Ever since Erie Railroad Company v. Tompkins (1938), the U.S. Supreme Court has recognized that federal courts should generally follow state law if not doing so would significantly affect the outcome of the case. As Andy Hessick and I argued in an article published earlier this year—titled Erie and Forum Selection Clauses—enforcing a forum selection clause will generally have a significant impact on the outcome of the case. Among other things, litigating in the Netherlands rather than North Carolina will impact the cost of transporting evidence, witnesses, and parties. Litigating the Netherlands will also influence what law will be applied and whether the case is heard by a judge or a jury. All of these considerations counsel in favor of applying state law—not federal law—to determine whether the clause is enforceable in the first instance.
The Decision
This is not what happened.
Instead, the federal district court cited to Fourth Circuit precedent to hold that federal courts sitting in diversity should apply federal law to evaluate whether a forum selection clause is enforceable. The relevant passage appears below. I have added brackets to identify the court’s three main arguments:
[1] While state statutes, such as N.C. Gen. Stat. § 22B-3, may be relevant for determining venue and forum in state courts, federal law governs venue and forum issues in federal court, as these are procedural matters. [2] The Supreme Court’s decision in Bremen rejected the “provincial attitude” toward forum selection clauses, emphasizing that such a narrow view undermined the enforcement of contracts between parties who had agreed to resolve disputes in a specific forum. [3] The Court further established that forum selection clauses are presumptively enforceable in federal court, regardless of state-level reluctance. As a result, state laws cannot override the federal policy that favors enforcing contractual forum choices.
Each of these argument is unconvincing. The first argument is flawed because it fails to recognize that the question of whether a forum selection clause should be given effect is an issue of contract law. While the answer to this question will affect the way the court analyzes venue and forum issues, the core analysis requires the court to determine whether a contract provision is void in the first instance. Since there is no federal general common law of contracts, this issue can and should be resolved as a matter of state law.
The second argument fails because the Bremen decision expressly states that a forum selection clause shall not be enforced when it is contrary to public policy: “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.” That is precisely the fact pattern presented in Flahive. The forum state—North Carolina—has enacted a statute expressly stating that enforcement is contrary to state public policy. Under the test set forth in the Bremen, this clear statement of public policy should be enough to invalidate the clause.
The third argument mischaracterizes the holding in the Bremen. That case was decided by the Court as a matter of federal admiralty law. There was no discussion in the decision of “state-level reluctance” in the decision because the suit began and ended its life as a federal admiralty case. The decision is, moreover, not binding on the states outside of the admiralty context. To hold that the Bremen somehow preempts the hundreds of state statutes invalidating outbound forum selection clauses in non-admiralty cases fundamentally misunderstands the facts and holding in that decision.
The Broader Context
The decision in Flahive, while frustrating, is consistent with a number of other decisions rendered by federal district courts in the Fourth Circuit. In Erie and Forum Selection Clauses, we showed that the enforcement gap between state and federal courts in the Fourth Circuit was the largest in the United States.
| Table 2: State and Federal Enforcement Rates for Forum Selection Clauses, by Circuit | |||
| Circuit | State Cases
(2010-2020) |
Federal Diversity Cases
(2014-2020) |
Difference |
| Fourth Circuit | 67% | 96% | 29% |
| Eighth Circuit | 64% | 88% | 24% |
| Sixth Circuit | 73% | 93% | 20% |
| Third Circuit | 76% | 95% | 19% |
| Eleventh Circuit | 78% | 96% | 18% |
| Second Circuit | 78% | 94% | 16% |
| First Circuit | 79% | 94% | 15% |
| Overall | 79% | 90% | 11% |
| Ninth Circuit | 78% | 85% | 7% |
| Tenth Circuit | 86% | 91% | 5% |
| Fifth Circuit | 90% | 90% | 0% |
| Seventh Circuit | 85% | 85% | 0% |
These data demonstrate the existence of a massive Erie problem. The difference between enforcement rates between state and federal court unquestionably creates incentives for forum shopping between those courts. It also suggests that the law is being applied inequitably because out-of-state defendants can generally remove a case to federal court while in-state defendants cannot. To date, however, these findings have had exactly zero impact on the way that federal courts go about determining whether a forum selection clause should be enforced in diversity cases.
And so, the great push continues. I will continue to blog about this issue. I will continue to assist lawyers litigating these cases to the extent that this assistance is welcome. And perhaps someday I will see the top of the hill… if the boulder doesn’t crush me on the way down.