P (a domiciliary of Texas) and the D Corp. (an English corporation with its principal place of business in England) entered into a contract for P to take a cruise from Galveston, Texas to the Cayman Islands. The contract contained a choice-of-forum provision that stated that all suits arising out of the cruise should be brought in England. While boarding the cruise ship in Galveston, P slipped and severely injured himself.
P brought suit against the D Corp. in Texas state court in Galveston under Texas negligence law. The D Corp. removed to the federal district court for the Eastern District of Texas. The D Corp. then made a motion to dismiss, appealing to the choice-of-forum clause. Texas state courts have refused to enforce choice-of-forum clauses of the sort in P and the D Corp.’s contract on grounds of public policy. In the context of actions with federal question and admiralty jurisdiction, federal courts have created a judge-made rule upholding such choice-of-forum clauses, provided that they were freely agreed upon by the parties to the contract. Should the federal court in Texas uphold the choice-of-forum clause and grant the D Corp.’s motion to dismiss?
As most of you recognized, this was an Erie question – one that is very similar to an actual Erie question that is currently unresolved by the Supreme Court. There is in fact a federal common law standard for determining the enforceability of forum selection clauses, articulated in an admiralty case. See M/S BREMEN v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Like the standard in the exam question, it is relatively pro-enforcement. And, as in the exam question, some states refuse to enforce forum selection clauses. The Supreme Court has not answered which standard applies in a diversity case.
The matter is made a bit more complicated – but in a way irrelevant to your answering the exam question – because in cases in which the defendant uses the forum selection clause to compel transfer of from one federal district court to the federal district court chosen by the clause, the Supreme Court has decided that the enforceability of the clause is governed by a federal statute related to transfer of venue, 28 USC § 1404(a). Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 32 1988). In Stewart, the Court read a pro-enforcement policy into the 1404(a). Since the enforceability of the clause in cases of transfer is handled by a federal statute, we know from Hanna that the statutory standard applies in a diversity case as long as the statute is valid, that is, as long as it regulates a matter that is arguably procedural (which it does).
But what if the forum selection clause cannot be used to transfer the case to another federal district court, because the clause says that a particular state court or a court in a foreign nation must take the case? In such cases (which include the situation in the exam question) 1404(a) is not at issue and one must face the more complicated Erie question of whether the federal common law standard, already articulated for admiralty cases, or the relevant state standard applies. This is an issue about which federal courts have disagreed. See, e.g., Northwestern Nat'l Ins. Co. v. Donovan, (7th Cir. 1990) (federal law); Manetti-Farrow, Inc. v. Gucci Am., Inc., (9th Cir. 1988) (federal law); Farmland Indus., Inc. v. Frazier-Parrott Commodities, Inc., (8th Cir. 1986) (state law).
Notice that the federal law on the matter is common law – not constitutional law, federal statutory law, or a federal rule of civil procedure. Some of you said that there was no federal common law rule on point because no rule had yet been articulated for diversity actions. This was confused. There clearly is a federal common law rule in place, namely that articulated in federal question and admiralty actions. What has not been decided is if the federal common law rule applies in diversity actions. If a federal rule had been articulated for diversity actions, the Erie issue in the question would have already been answered – it would have already been decided that the federal rather than state standard applies in diversity actions.
Some of you wondered whether the enforceability of forum selection clauses is actually a matter bound up with state substantive rights and obligations, making the application of state law constitutionally required. See Byrd (which my students didn't read this year). After all if P sued D for breach of contract in federal court in diversity and the federal court ignored state contract law, using its own federal principles of when contracts should be held valid, that would clearly be the type of substantive common law making that occurred in Swift v. Tyson and that Erie held unconstitutional. And wouldn’t a federal court using its own legal standards for assessing the enforceability of a provision in a contract in a diversity case, rather than the relevant state standards, be such substantive common law making? You were rewarded for worrying about this.
But the question is not the enforceability of the contract in general, but the enforceability of a provision concerning where lawsuits may be brought. Questions of when rights to bring a lawsuit in a federal court can be altered by private agreement certainly sound sufficiently procedural to take them outside the category (identified in Byrd) in which state law must be applied as a constitutional matter.
That means we are probably within the “relatively unguided Erie choice” described in Hanna. The first question, therefore, is whether having differing state and federal rules on the matter would be contrary to the twin aims of Erie: avoiding vertical forum shopping and the inequitable administration of the laws. As many of you noted, there would be a forum shopping problem. The plaintiff, who wanted to sue in a place contrary to the forum selection clause would sue in state court, where the clause might not be recognized, whereas the defendant would remove to federal court in order to get the action dismissed. This is also arguably inequitable administration of the laws, since the chance of getting the action dismissed would be available to an out of state, but not an in-state defendant.
The next question is possible federal interest in the application of federal law (of the sort mentioned in Byrd) and, perhaps, state interests that would recommend the application of state law in federal court (the role of state interests was not really discussed in my class this year, so I wouldn't expect a discussion of that). I was looking for some original thought here. You need to actually think about why the federal and state rules exist – the purposes standing behind them.
Many of you did not. It was common for people to say vaguely that the purpose behind the state rule was “public policy.” We know that this is true (I said that in the question). But what public policy? You needed to say. One possibility is that the idea that Texas is especially protective of Texans’ ability to sue in Texas concerning events that happen in Texas (because of the inconvenience to the Texas plaintiff of going to another forum or because of the presence of witnesses in Texas). Indeed Texas is so protective that it will not let Texans contract away this right. I was very generous in grading if you made a stab at actually determining what the purpose of the state law was, but you had to make a stab.
As for the federal law – one possibility is docket clearing (federal courts like it when people choose other fora than federal court for their suits). Another is a belief in people’s ability to determine for themselves in their contracts what is in their best interest. Once again I was generous if you made an attempt to discern the purposes behind the federal standard.
I also made no demands about what conclusion you thought these various factors pointed to – state or federal law. (For the record, I think state law should apply.)