Enforcement Of Forum-Selection Clauses In Commercial Contracts Involving Patents And Other Federal Disputes

Synopsis:

When parties go to the time and effort of creating clauses in their contracts, they like to know they will be enforced. A prime example is designating where litigation will occur if there is a dispute. These are called “forum-selection clauses”. Fortunately, recent federal cases allow such enforcement, even over the objection of the other party. An example would be a desire by a patent owner to preclude litigation through the Patent Trial and Appeal Board (“PTAB”) and instead requiring the matter to be heard in Federal district court. The owner may have been told by counsel that in a PTAB proceeding, the company holding a license has a better chance of invalidating the patent and discovery is not as comprehensive in such proceedings. The owner therefore wishes to designate a U.S. district court for litigation. The positive news is a recent Federal case affirmed a preliminary injunction barring PTAB proceedings, instead requiring them to be held in a Federal district court based upon a forum-selection clause

(Dodocase VR, Inc. v. MerchSource, LLC, 2018-1724
(Fed. Cir. Apr. 18, 2019).

There is also authority from the U.S. Supreme Court that such clauses are enforceable in other types of federal litigation.

Read more . . .

Example:
ABC Company is the patent owner of certain IP software. Its main office is in Atlanta, Georgia. Its officers and directors operate from that office, as well as corporate counsel. ABC does substantial business in California and enters into a licensing agreement in that state with DEF Company with offices in Los Angeles. The license agreement states in the event of a dispute, litigation shall be in the United States District Court for the Northern District of Georgia. A dispute did arise and DEF brings suit in U.S. District Court located in Los Angeles. ABC would rather have it heard in Atlanta, especially to prevent having to hire expensive out-of-state counsel and references the forum-selection clause. As a result, ABC brings a motion for change of venue under 28 U.S.C. 1404(a) requesting transfer to Atlanta. DEF resists with the argument that ABC has done substantial business in California as well as the fact the contract was signed, performed and breached in that state. Will ABC be successful?

Discussion:

Patent Disputes. As far as patent disputes, the Dodocase case cited above is particularly instructive.

Plaintiff was the owner of patents related to virtual-reality headsets. Plaintiff entered into
a license agreement with the defendant who was a distributor of consumer products.
The license agreement contained a clause forbidding a challenge to the patent validity
and also a forum-selection clause mandating litigation in California. Thereafter, defendant informed the plaintiff it would no longer be paying royalties because it believed the patent claims were invalid. Defendant then filed petitions requesting Inter Parties Review and commenced proceedings with the PTAB. Plaintiff followed by bringing a Federal suit in the Northern District of California requesting an injunction prohibiting the defendant from further proceedings in the PTAB because of the forum-selection clause. The Court agreed and issued a preliminary injunction. Thereafter, the appellate court agreed, and prevented proceedings in the PTAB.

The forum-selection clause clearly stated that all “disputes” would be resolved in California District Court. The defendant argued this would be limited to issues such as the amount of the royalty due or the term of the license agreement. It considered patent infringement disputes not to arise from the license agreement. The Court disagreed. Finding the forum-selection clause clear on his terms, it held further litigation be done exclusively in Federal district court.

The take-away is if your forum-selection clause is properly drafted, it will preempt challenges in the PTAB.

Non-patent Commercial Disputes in General. What about the enforceability of forum-selection clauses as to other non-patent litigation? To what extents are they enforceable? Fortunately, the U.S. Supreme Court has weighed in on this issue and provides guidance. A recent example is Atlantic Marine Constr. Co. v. U.S. Dist. Court for the W. Dist. of Texas, 571 U.S. 49 (2013).

In this case, Atlantic as general contractor entered into an agreement with defendant as a subcontractor in the construction of a child development center at Fort Hood in the Western District of Texas. The subcontract included a forum-selection clause that stated all disputes “shall be litigated in the Circuit Court for the City of Norfork, Virginia or the United States District Court for the Eastern District of Virginia.” When a payment dispute arose, the subcontractor sued the plaintiff in a Federal District Court in Texas under diversity jurisdiction. Atlantic then moved to transfer the case to Federal Court in Virginia under 28 U.S.C. 1404(a). The District Court denied the motion, but the Supreme Court reversed and upheld the forum-selection clause.

In reaching its conclusion, the Court examined the parameters of 1404(a) which provides for transfer in the convenience of the parties and witnesses or to otherwise promote the interests of justice. It then concluded the enforceability of the forum- selection clause was proper in transfer to the Virginia District Court:

When the parties have agreed to a valid forum-selection clause, a district court should ordinarily transfer the case to the forum specified in that clause. Only under extraordinary circumstances unrelated to the convenience of the parties should a 1404(a) motion be denied (Id. at p. 62).

The court reasoned that analysis of such factors as “the convenience of the parties and witnesses” and to promote “the interests of justice” applies in a forum non-conveniens motion only. But it does not apply if the parties have voluntarily and specifically agreed in a contract provision for a particular forum. This is because it would be the result of the bargain of the parties and would protect their legitimate expectations–especially if in exchange for other binding promises by the parties. Those expectations should be disturbed only in the most exceptional cases (Id. at p. 63).

The only caveat is the designated forum must otherwise qualify for proper venue. For example, in the district court of defendant’s residence, defendant corporation’s principal place of business, where the underlying events occurred or the location of the subject property.

Further, these rules do not apply to the selection of a state court (designating a distant state or a particular county within a state). There, one is subject to the various statutes and case law of the applicable state.

The lesson: you are safe if you have a specifically drafted forum-selection clause in your commercial contract. But make sure it is robust.

Forum Selection Clauses:

The following type of clause may get you to first base, but not all the way home: All disputes relating to and arising from this contract shall be litigated in the United States District Court for the Northern District of Georgia.

A better clause (with the parties initialing the section) would be as follows:

_____ (initials) _____ (Initials). FORUM SELECTION. All disputes relating to and arising from this contract shall be litigated solely in the United States District Court for the Northern District of Georgia, which shall have exclusive jurisdiction and venue. The parties consider this clause to be a major factor in the negotiation of this contract and as such protects their legitimate expectations. This forum shall apply, regardless of such alleged ameliorating factors, listed as examples but not by limitation, as: ease of access to sources of proof, availability and attendance of lay and expert witnesses, convenience of the parties and their counsel, travel costs, the possibility of a view of the premises, and other factors that may make the trial of the case elsewhere easy, more convenient, expeditious or inexpensive.

If a party institutes an action or proceeding in another forum, the other party may bring a motion for change of venue under 28 U.S.C. 1404(a) or similar statute, which shall be considered unopposed and will subject to the breaching party to an award of reasonable attorney’s fees and costs.