Forum Selection Clause Enforceable Even When Party Unrepresented in Negotiations

On November 7, 2011, the United States Court of Appeals for the Fifth Circuit issued an instructive decision regarding the enforcement of forum selection clauses. Of particular note, the Fifth Circuit upheld the enforceability of a clause limiting the parties’ dispute exclusively to state court, even though a federal court would otherwise have been able to exercise diversity jurisdiction over the instant dispute. In so doing, the Fifth Circuit rejected the claims of one of the parties that the inclusion of the forum selection clause was a product of fraud or overreaching because the drafting attorney violated the rules of professional conduct.

In Lighthouse MGA, LLC v. First Premium Insurance Group, Inc., Case Nos. 1-30293 and 11-30500 (5th Cir. Nov. 7, 2011), the parties entered into a marketing services agreement. The contract, including the forum selection clause in question, was drafted by the general counsel for First Premium. Lighthouse, the other party to the agreement, was not represented by counsel during the negotiations. In the executed agreement, the parties agreed, among other things, that: (1) Louisiana state law will govern; and (2) exclusive jurisdiction for legal actions related to the agreement would be brought in Louisiana’s 22nd Judicial District Court. The specific provision read:

The agreement shall be governed by and interpreted in accordance with the laws of the State of Louisiana without reference to principles of conflicts of law. [Lighthouse] irrevocably and unconditionally submits in any legal action or proceeding related to this agreement or for recognition of any judgment in respect thereof, to the exclusive jurisdiction of the 22nd Judicial District Court, Parish of St. Tammany, State of Louisiana.

Following a dispute between the parties, Lighthouse filed a claim related to the agreement in federal court, and when First Premium filed its own claim in Louisiana State Court, Lighthouse moved to remove that suit to federal court as well. The United States District Court for the Eastern District of Louisiana dismissed Lighthouse’s federal complaint and rejected Lighthouse’s attempt to remove the state court claim to federal court.

On appeal, the Fifth Circuit held the forum selection clause was enforceable and, in doing so, rejected a variety of arguments by Lighthouse as to why the forum selection clause should not be enforced. Lighthouse first argued that it had a constitutional right to have its dispute heard in federal, as opposed to state, court. The Fifth Circuit rejected this argument noting that the United States Constitution did not prevent a party to a contract waiving its right to have its day in federal court.

With respect to whether Lighthouse had validly waived its right to be heard in federal court, the Fifth Circuit rejected the argument that Lighthouse’s waiver was invalid because First Premium’s attorney did not highlight the clause or otherwise explain its significance to Lighthouse. The Fifth Circuit noted that under Louisiana law, a party who signs a contract is presumed to know its contents and cannot disclaim its obligations by claiming that the contract was not explained. Lighthouse, therefore, “cannot maintain that it did not knowingly and willingly waive diversity jurisdiction on the basis that First Premium’s general counsel did not discuss the forum selection clause with Lighthouse or warn Lighthouse of the clause’s existence.”

The Fifth Circuit also rejected Lighthouse’s argument that the clause was unenforceable because First Premium’s general counsel violated Louisiana’s Rules of Professional Conduct in negotiating the provision. According to the Fifth Circuit, there was no evidence that First Premium’s counsel indicated that he represented Lighthouse or its interests during the negotiation. Moreover, the Court held, “even if Lighthouse subjectively believed that First Premium’s general counsel was also Lighthouse’s attorney, such a belief would not be reasonable.”

Bottom line: Do not overlook your forum selection clauses. Draft them precisely to represent the agreement between the parties with respect to what forum will be used to litigate disputes. As made clear by the court in this case, forum selection clauses may be enforced even when enforcement will result in a party being deprived of the opportunity to have its contract case heard in federal court.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Matthew A. Karlyn
Partner
Boston, Massachusetts
617.502.3231
[email protected]

Courtney Worcester
Senior Counsel 
Boston, Massachusetts
617.502.3218
[email protected]

Peter I. Sanborn
Associate
Boston, Massachusetts
617.502.3367
[email protected]