The Supreme Court Declines To Resolve The Circuit Split On Forum Selection Clauses
Late last year, the Supreme Court denied certiorari in Howmedica Osteonics Corp. v. DePuy Synthes Sales, Inc., which was brought to the Supreme Court for reviewfrom an opinion of the Ninth Circuit Court of Appeals. 28 F.4th 956 (9th Cir. 2022). At the heart of Howmedica (as explained in a previous article, here) was the classic Erie law school hypothetical – does federal or state law control in federal court when deciding if a party’s contractual forum selection clause preempts a state statutory forum selection mandate?
To briefly summarize the Howmedica case: A former sales representative for Howmedica had an employment agreement containing a New Jersey forum selection and choice of law provision, as well as noncompete and nonsolicitation clauses. He ultimately resigned and went to work for a competitor. When Howmedica attempted to enforce the restrictive covenants, the former employee asserted that the forum selection and choice of law clauses were void under California Labor Code § 925, because he was a California resident. The former employee filed a declaratory judgment action in the Central District of California, asking the court to declare those provisions void. Howmedica moved to transfer venue to the District of New Jersey under 28 U.S.C. § 1404(a). The district court denied the motion, holding that state, not federal, law governed the validity of a forum selection clause in a contract, and that the forum selection clause was therefore invalid and unenforceable. The Ninth Circuit agreed, and held that § 1404(a) and Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), “do not broadly preempt all state laws controlling how parties may agree to or void a forum-selection clause.” Howmedica then petitioned the Supreme Court for certiorari review.
By applying state law to decide the validity of a forum selection clause, the Ninth Circuit joined the Seventh Circuit in the minority on this issue. See, e.g., Jackson v. Payday Fin., LLC, 764 F.3d 765, 774 (7th Cir. 2014). The Second, Third, Fourth, Fifth, Sixth, Tenth, Eleventh, and D.C. Circuits have all gone the other way—they hold that federal law as pronounced in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), applies to determine the validity and enforceability of forum selection clauses.
Despite the circuit split, the Supreme Court denied Howmedica’s petition for certiorari on December 12, 2022. This means that in practical terms, significant uncertainty remains with respect to how contractual forum selection clauses will be treated in the face of the increasing number of state statutes that mandate a given forum for particular subjects, such as employment restrictive covenants.
But, the case law is also far from uniform on a multitude of subsidiary issues. For example, courts have come to opposite conclusions on whether a given state’s statutory forum selection mandate (such as in the Massachusetts Noncompetition Agreement Act (“MNAA”)) in and of itself demonstrates that state’s clear public policy for the purposes of deciding a motion for transfer. In Hilb Grp. of New England, LLC v. LePage, for example, the Eastern District of Virginia held that “no Massachusetts court has held that the Massachusetts Noncompete Agreement Act [which mandates that all cases involving Massachusetts residents must take place in Massachusetts] manifests the state’s strong public policy. Thus, the enforcement of the Agreement’s forum selection clause would not go against a strong public policy of Massachusetts.” No. 3:21-cv-757, 2022 WL 1538583, at *4 (E.D. Va. May 16,2022). In contrast, the Delaware Chancery Court came to the opposite conclusion regarding whether a statute demonstrates a state’s public policy. In AG Res. Holdings, LLC v. Terral, the Delaware Chancery Court held that “[t]he Louisiana [forum selection] laws cited above are clear pronouncements by the Louisiana legislature regarding its public policy on matters of employment and competition. Under the circumstances, Louisiana’s interests must be respected and enforced.” No. CV 2020-0850-JRS, 2021 WL 486831, at *5 (Del. Ch. Feb. 10, 2021). Idaho provides another example. Idaho Code § 29-110(1) states that it is against Idaho public policy for a contract to restrict a party’s ability to enforce its rights in Idaho courts. Idaho courts have interpreted this statute as evidence of the state’s “strong public policy” against forum selection clauses that mandate proceedings outside of Idaho. See, e.g., Off-Spec Sols., LLC v. Transportation Invs., LLC, 168 Idaho 734, 739, 487 P.3d 326, 331 (2021); see also Gemini Technologies, Inc. v. Smith & Wesson, Corp., 931 F.3d 911, at 915-17 (9th Cir. 2020).
This thorny issue will continue to cause uncertainty for employers operating in multiple states, as well as employers whose workforce is spread out across more than one state. Without clear guidance from the Supreme Court, practitioners must continue to be sensitive to the ever-changing landscape of state laws and the judicial decisions interpreting those laws, in order to understand where a case may eventually be heard, and what laws may apply to the dispute.
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[1] By way of example of the disparate outcomes in different jurisdictions, analyzing the very same forum selection clause, in the very same employment contract at issue, the District of New Jersey upheld the forum selection clause, and rejected arguments that California Labor Code § 925 invalidated it. Howmedica Osteonics Corp. v. Howard, 2020 WL 1102494, at *3 (D.N.J. Jan. 17, 2020), report and recommendation adopted, 2020 WL 1082601, at *1 (D.N.J. Mar. 5, 2020). Same facts—opposite outcome.