Forum Selection Clauses: A Powerful Tool in Managing Disputes

Forum Selection Clauses in Contracts

Buried in the boilerplate of most contracts are two seemingly innocuous provisions: a governing law provision and a forum selection provision. These provisions, typically focused on only by attorneys drafting or reviewing the contract, are crucial. For example, without a governing law provision, the contract will be governed by the law most relevant to the contract and its performance, such as where the contract was entered into, where the goods or services are delivered, or where the parties are located. When parties use a governing law provision, courts in states other than the governing law state will usually respect governing law provisions and will interpret the law of a different state.

Forum Selection Clauses: An Overview

Less common, but in many contracts also buried in the boilerplate, is a forum selection clause. Using a forum selection clause in a contract allows the parties to choose where actions related to those contracts might be heard. Without a forum selection clause, the general rules of civil procedure will apply – e.g., location of the parties, where performance occurs, etc. Without a forum selection clause, parties could be subjected to the courts of a state which could be unfavorable to the party. These disadvantages include:

Costs to try in a different jurisdiction – local counsel, travel costs
Home court advantage for other party
If in federal system, courts may be in a completely different appellate district

Benefits of Forum Selection Clauses

Attention to and/or addition of a forum selection clause is important in every contract and should not be overlooked as mere boilerplate. For example, a forum selection clause may also be a way to reduce or eliminate multiple lawsuits in certain contexts. In consumer contract cases, a company may face multiple suits in different states over similar issues, resulting in potentially different outcomes. Forum selection clauses allow the company to consolidate cases into one court system. These clauses are likely to be upheld if the forum has some relationship to the parties (such as the place of the company’s business or where performance occurs). Further, a forum selection clause could also limit multiple class action claims if those claims arise under contract to a single forum, which can make for easier consolidation and reduce the likelihood of inconsistent results.

Use Beyond Contracts

The use of and need for forum selection clauses are not limited only to contracts. Corporations can add a forum selection provision to their bylaws or their articles of incorporation to drive shareholder derivative and other corporate governance lawsuits to a particular forum. A number of states are upholding the choice of forum in this context.

Recent Case Law and Implications

What in-house counsel need to know about forum selection clauses is that recent case law suggests they can have other far-reaching consequences. Indeed, a forum selection clause may also be able to cut off a claim that a party may have in other contexts. For example, a patent licensor may insert a forum selection clause in a patent license that requires any actions to invalidate a patent be heard in a particular federal court. Such a forum selection clause might cut off a licensee’s ability to bring an inter partes review action at the US Patent & Trademark Office to invalidate the patent. See Texas Instruments Inc. v. Tessera Inc. 231 F.3d 1325 (Fed. Cir. 2000); Gen. Protecht Grp. Inc. v. Leviton Mfg. Co. 651 F.3d 1355, 1366 (Fed. Cir. 2011). This means that forum selection clauses should be considered carefully as they may lead to unintended consequences.

Corporate Governance Context

In the corporate governance context, forum selection clauses are also important and can have a significant impact. For example, in a case last year, the 9th Circuit Court of Appeals held that a forum selection clause in The Gap’s bylaws required a shareholder derivative lawsuit related to an alleged Securities Act violation to be heard in Delaware Chancery Court, even though the clause would effectively leave the shareholders without any means of asserting claims on behalf of the company for alleged proxy disclosure violations of the Securities and Exchange Act of 1934. See Lee v. Fisher D.C. No. 3:20-cv-06163-SK (filed June 1, 2023). In another case, a California court found that a forum selection clause in a corporation’s organizational documents that required any securities cases be brought to a federal district court in Delaware only was valid, even though it would effectively cut off a shareholder’s right to trial in state court. See Wong v. Restoration Products No. A161489, 2022 WL 1261423 (Cal. Ct. App. Apr. 28, 2022).

Strategic Considerations in M&A

Indeed, a forum selection clause can be quite helpful in corporate governance disputes. For example, large M&A deals are usually subject to a race to the courthouse to challenge the M&A transaction. In a recent case we were involved in, we ended up having to defend against lawsuits in three states, and the forum selection clause in the company’s bylaws allowed us to have the case transferred to a single jurisdiction. In our case, the first suit filed was filed in a district court which had very little experience with M&A transactions and little experience with another state’s laws. The forum selection clause in the company’s bylaws allowed the case to be transferred to a jurisdiction and courts with extensive experience over such matters.

Timing of Adding Forum Selection Clauses

In the context of forum selection clauses in corporate organizational documents, one of the most important aspects, however, is that the forum selection clause should be added before any action that can give rise to litigation occurs. Adding it at the time of entry into an M&A transaction or a corporate action that might result in litigation (e.g., an IPO or a proxy), depending on the jurisdiction, may allow a plaintiff to claim that it should not apply. For corporate practitioners, adding a forum selection clause at its formation is usually the best time to add it. For existing companies contemplating a transaction – such as an IPO or an M&A transaction – the corporation should adopt the forum selection clause before undertaking the transaction – and the earlier the better. In the context of going public, adopting the clause before going public is preferred as it is usually easier to add before the company becomes public and could help corral actions that might arise out of the IPO process.

Considerations for Texas Businesses

For companies organized under Texas law or doing business in Texas, the new Texas Business Courts may the appropriate court and should be considered in the forum to be used in a forum selection clause. For an article on Texas Business Courts, please see: Texas Business Courts: A New Tool for In-House Counsel.

For more information about business litigation and corporate law, see the Klemchuk PLLC Industry Focused Legal Solutions pages.

Klemchuk PLLC is a leading IP law firm based in Dallas, Texas, focusing on litigation, anti-counterfeiting, trademarks, patents, and business law. Our experienced attorneys assist clients in safeguarding innovation and expanding market share through strategic investments in intellectual property.

This article is provided for informational purposes only and does not constitute legal advice. For guidance on specific legal matters under federal, state, or local laws, please consult with our IP Lawyers.

Blog, Law, CorporateMark StachiwMay 14, 2024