Well-written employment agreements will often have both forum selection (which court is to have jurisdiction) and choice-of-law (which state’s law will be applied to interpreting and enforcing a contract) provisions, and earlier this month the Second Circuit clarified how federal courts should analyze forum selection clauses in agreements that also have choice-of-law language. This is a huge issue, particularly in the area of restrictive covenants as the enforceability of those covenants can vary greatly from state to state and even from court to court within those states. Federal law governs the enforceability of the forum selection clause, the court held, but the body of law identified in the choice-of-law clause governs how courts interpret the forum selection provision. Courts have not always articulated this distinction clearly, and the Second Circuit’s guidance should be helpful to lawyers analyzing their clients’ employment contracts.
In Martinez v Bloomberg, 2014 WL 114252 (2d Cir. Jan 14, 2014) , the plaintiff was a London-based employee of Bloomberg, L.P., the financial software and media company. After he was fired in 2011, the plaintiff filed a discrimination suit in the Southern District of New York, alleging among other things that he was discharged because of a perceived disability in violation of the Americans with Disabilities Act. The district court dismissed the case as barred by the plaintiff’s employment agreement, which had a combined forum selection and choice-of-law clause: the contract “shall be interpreted and construed in accordance with English law and any dispute arising hereunder shall be subject to the exclusive jurisdiction of the English courts.” Id. at *1.
The Second Circuit affirmed in an opinion that clarifies the respective roles that federal and state (or in this case, foreign) law play in interpreting a forum selection clause. Here, the court distinguished between the interpretation and enforceability of such a clause, explainingthat federal law must govern the ultimate enforcement of forum selection clauses to preserve federal courts’ ability to decline to enforce the clauses in appropriate cases—for example, where the clause was the result of fraud or overreaching or where enforcement of the clause would be unreasonable or unjust.
Under federal law, the test for enforceability has four prongs. Courts ask: “(1) ‘whether the clause was reasonably communicated to the party resisting enforcement’; (2) whether the clause is ‘mandatory or permissive, i.e., … whether the parties are required to bring any dispute to the designated forum or simply permitted to do so’; and (3) ‘whether the claims and parties involved in the suit are subject to the forum selection clause.’” Id. at *4 (quoting Phillips v. Audio Active Ltd., 494 F.3d 378, 383 (2d Cir. 2007)) (emphasis in Phillips). The clause is presumptively enforceable if it “was communicated to the resisting party, has mandatory force and covers the claims and parties involved in the dispute.” Id. “A party can overcome this presumption only by (4) ‘making a sufficiently strong showing that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.’” Id. (quoting Phillips, 494
F.3d at 383-84).
In Martinez, the court explained that although federal law governs the enforceability of forum selection clauses, prongs two and three of the federal enforceability test raise interpretive questions that must be resolved using the body of law specified in the choice-of-law clause. Id. at *4. This approach ensures that federal courts will interpret contract language in accordance with the parties’ legitimate expectations at the time that they drafted the agreement. Id. at *4-6. And, the court noted, applying state law to contract interpretation questions is in accord with the federal courts’ traditional distinction between procedural rules (the rules of the court) and substantive rules (the applicable law). Id. at *7. Courts interpreting contract language may confront a wide range of substantive contract questions (e.g., the effect of ambiguous language and the scope of the parol evidence rule) that are firmly the purview of state law. See id.
Applying this framework, the Martinez court found that the forum selection clause required the plaintiff to bring suit in England. First, it applied English law to answer the interpretive question of whether the plaintiff’s claims were within the scope of the forum selection clause. It concluded yes, the plaintiff’s discrimination claims were disputes “arising under” his employment agreement. Id. at *10. Then, the court applied federal law to determine the whether the clause was enforceable; here, it focused on the fourth prong of the enforceability inquiry—whether enforcement “would be unreasonable or unjust.” Id. at *14. The Court rejected the plaintiff’s attempts to resist the clause, including his argument that forcing him to litigate in England would effectively deprive him of any remedy because his English claims were likely time-barred. Id. at *14-16.
Martinez’s holding is not limited to the employment context, but the opinion is a useful guide for understanding a distinction that courts and practitioners have blurred in the past. See id. at *9. The case makes clear that federal courts must use the parties’ chosen body of law to interpret forum selection clauses but that the ultimate question of enforceability remains a matter of federal law.