Forum Selection Clauses: The De Facto Choice-of-Law Clauses 1

The Effect of a Forum Selection Clause Where a contract contains an enforceable forum selection clause, the choice of law clause will be enforced as well Where a forum selection clause is held unenforceable, the choice of law clause will also be unenforceable Where a contract contains a forum selection clause, enforceability of the choice of law clause depends not on where the lawsuit is filed, but on the enforceability of the forum selection clause Where a contract contains only a choice of law clause, the enforceability of that clause is dependent upon the forum in which the action is brought 2

A Few Statistics Forum selection clauses are upheld in more than 66% of cases Choice of law provisions are upheld in 100% of cases where a forum selection clause has been enforced, accordingly, choice of law clauses paired with forum selection clauses are upheld in 66% of cases Choice of law clauses that are not paired with a forum selection clause are held unenforceable in 50% of cases Choice of law clauses are more than 16% more likely to be upheld when paired with a forum selection clause In more than 80% of cases involving a choice of law issue, forum law is applied 3

Judicial Treatment of Forum Selection Clauses The Supreme Court has held that contractual forum selection clauses are prima facie valid (M/S Bremen v. Zapata Off-Shore Co.) Under the Restatement (Second) §80, forum selection clauses are enforceable unless unfair or unreasonable Courts have held forum selection clauses to be unreasonable in the following three situations: – 1. Where inclusion of the FSC was the result of fraud or overreaching; – 2. If the party challenging enforcement of the FSC would effectively be deprived of its day in court in the forum specified in the FSC; or – 3. If enforcement would contravene a strong public policy of the forum in which the lawsuit has been brought (the Bremen public policy exception). The party challenging the enforcement of the forum selection clause bears a heavy burden of proof (Id.) 4

Application of the Bremen Public Policy Exception Application of the Bremen public policy exception has generally been limited to two types of cases: – 1. Cases where the public policy underlying the state law claim relates to venue E.g., Jones v. GNC Franchising, Inc.: FSC held unenforceable as contrary to CAs public policy because of a CA statute, explicitly making void any clause in a franchise agreement that limited venue to a non-CA forum – 2. Cases where the enforcement of the FSC would result in substantial impairment of a partys procedural rights E.g., Doe 1 v. AOL LLC: FSC held unenforceable because selected states law did not allow consumer class actions, thereby stripping consumers of important protections and remedies provided by CA law and violating an anti-waiver provision in CAs consumer protection law 5

The Standard Forum Selection Clause Analysis In most cases, courts must analyze a FSC independent of its effects So, when ruling on the enforceability of a FSC, courts are typically not permitted to consider the enforceability of a choice of law clause In support of this approach, courts have emphasized that forum selection does not decide choice of law In addition, courts have repeatedly insisted that the party arguing against enforcement of the FSC is free to argue for the application of a foreign states law in the selected forum 6

The Flaw in the Standard FSC Analysis Meras Engineering v. CH2O Facts – WA employer entered into two employment agreements with CA residents – Both employment agreements contained a WA FSC, a WA choice of law clause, and a non-compete covenant – Both of the employment contracts were performed in CA – Employees sued in CA state court for declaration of the invalidity of the non-compete covenants – Employer subsequently sued in WA state court to enforce the non-compete covenants 7

The Flaw in the Standard FSC Analysis Meras Engineering v. CH2O WA Court: CAs interest was not materially greater than WAs and WA choice of law clause was enforceable CA Court: (dismissed the case) Enforceability of the FSC must be determined without consideration of its potential effect on choice of law – CA and WA both apply Rest. 2d §187 to determine the enforceability of a choice of law clause, so, forum selection would not decide choice of law in this case – The WA court was free to find that CA had a materially greater interest than WA and accordingly, to apply the public policy exception to invalidate the non-compete covenants as contrary to CAs public policy – Criticized Plaintiffs for conflating the forum selection and choice of law analyses The Flaw: the CA court insists that Plaintiffs are free to argue for application of CA in the WA court…but, the WA court already ruled that WA law applied – The court blatantly ignores the effect of the forum bias and bases its decision on the theoretical possibility that the WA court could have applied CA law 8

Perrys Illusive Categorical Distinction The court in Perry v. AT&T described the inclusion of a single non-compete clause in an employment agreement as categorically different from a contract created entirely for the purpose of evading CA law Perry separated cases into two different categories – Category 1: FSC and choice of law provision may be analyzed together Includes cases in which selection of the forum will be determinative of choice of law E.g., Perry, Doe 1, Jones – Category 2: Analysis of the FSC must be entirely distinct from analysis of choice of law Includes cases where forum selection is not determinative of choice of law E.g., Meras Engineering – Not a Distinction At All: As Meras Engineering illustrates, the cases alleged to come within this second category are in fact, cases in which forum selection is determinative of choice of law and thus, are indistinguishable from the cases in category 1 on those grounds 9

Which Came First, The Chicken or the Egg? The Wisconsin Approach Beilfuss v. Huffy Corp. – OH corporation and WI resident enter into employment agreement containing OH FSC, OH choice of law clause, and a non-compete covenant – Employee sued in WI Circuit Court; OH corp. sued in OH state court Rule: [T]he validity of the choice of law provision is a precondition to determining the enforceability of the forum selection provision. Reasoning: – Enforcement of choice of law provision is contrary to WIs public policy re non-compete covenants – It is logical to have a court familiar with WI statutory and common law covering non-compete covenants to apply the law rather than a court in another forum, which is unfamiliar with WI law or public policy supporting the law – So, enforcement of the FSC is unreasonable 10

The Superiority of the WI Approach The assumption that forum selection does not decide choice of law is plainly false – Perhaps separate analysis made sense under the territorial approach, but under the modern approach this assumption is unsupported FSCs and choice of law are inextricably intertwined – The WI approach recognizes this, and treats FSCs accordingly – The WI approach extinguishes the illusory distinction proposed in Perry Mere convenience is insufficient – The fact that consideration of a FSC and a choice of law clause together might create more work for the courts does not justify the requirement that FSCs be considered independent of their effects The court in which the lawsuit is brought may in a better position to decide the enforceability of a choice of law clause FSCs are, in reality, de facto choice of law clauses Thus, courts should adopt the Beilfuss approach and treat the enforceability of a choice of law provision as a precondition to determining the enforceability of a FSC 11