Courts Endorse Businesses’ Using Forum-Selection Clauses As Litigation Management Tools

Guest Commentary

by Ross Coker*

Since its debut in the early 2000s, Google has grown at a startlingly rapid pace, becoming not only a global behemoth in the online search engine and advertising markets, but expanding its reach through smartphones, computer operating systems, and more.  Just this month, Google surpassed ExxonMobil as the world’s second largest company by market capitalization.

In the United States, such success inevitably makes one a target of class-action lawsuits.  To avoid being dragged into one of the country’s notorious Judicial Hellholes,® companies like Google include venue and forum selection clauses in their consumer contracts.  In addition to avoiding plaintiff-friendly jurisdictions, such clauses allow companies to resolve legal disputes close to “home” in a manner that minimizes disruption to conducting business.

A recent federal district court ruling, Rudgayzer et al. v. Google Inc., reflects the importance and effectiveness of these forum-selection clauses and clarifies their strategic underpinning.  Rudgayzer filed suit in the Eastern District of New York (EDNY) alleging improper notice after Google settled another class action suit involving the now-defunct “Buzz” product.  The judge dismissed Rudgayzer’s suit because the plaintiff had assented to Google’s consumer contract, which contained the forum-selection clause.

Santa Clara County, CA
Santa Clara County, CA

In order to reach that conclusion, the court had to first determine whether the clause could be enforced.  The court noted that the federal circuits are split on the legal standard to apply in this situation.  The Second Circuit, whose precedents bind the EDNY, permits dismissal under Federal Rule of Civil Procedure 12(b)(3) if the consumer was made aware of the forum-selection clause, the clause is mandatory by the terms of the contract, and state contract law permits the imposition of such a clause.  The plaintiff can escape the clause only if it can show that the transfer of its case would be “unreasonable or unjust.” 

Other federal courts of appeal, such as the Fifth Circuit, have addressed the forum-selection clause issue under 28 U.S.C. § 1404(a), and they have interpreted that provision in such a way that a forum-selection clause is only one factor among many a court must weigh when assessing a transfer request.  That provision provides that ““[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.”  As noted by the Rudgayzer court, the U.S. Supreme Court granted review last year in the Fifth Circuit’s most recent ruling on forum selection, Atlantic Marine Constr. Co v. United States Dist. Court., to resolve the current circuit split.

With Atlantic Marine hovering in the background, the EDNY court decided Rudgayzer on November 15, 2013.  The district court applied the Second Circuit’s analysis, finding that Google had satisfied each requirement and that the plaintiff offered no evidence that transferring the case to California was unreasonable or unjust.  The court stated, “[t]he forum selection clause is plainly mandatory, [i]t states that Santa Clara County is the ‘exclusive jurisdiction’ for bringing actions arising from the agreement. The clause therefore requires—rather than simply permits—suits to be brought in the selected forum and venue.”

A little over two weeks later, the Supreme Court decided Atlantic Marine.  In sum, the Court found that transfer could be pursued under either FRCP 12(b)(3) or 28 U.S.C. § 1404(a).  If the defendant sought a transfer under § 1404(a), the Court held that the trial judge must transfer the case absent extraordinary circumstances.

The holding and reasoning in Atlantic Marine are fully consistent with that of the court in Rudgayzer. The decisions are an encouraging sign that companies can count on courts to enforce contracts as written and agreed to by the parties.  The ability for any large corporation with the diversity and breadth of Google to determine where and how it will address inevitable legal challenges is crucial.  Google’s business model and strategy, though somewhat unique, still benefits from predictability and easy disposal or management of claims against it.  This is more true than ever in the current privacy-centric climate, given that most of Google’s product revenue is derived from its innovative AdWords system, a product that sits at the center of a universe of related products featuring streamlined ad targeting based on permissibly collected user data.

*Ross Coker is a second-year law student at Pepperdine School of Law and is currently an extern at Washington Legal Foundation as part of the Pepperdine Law DC Externship Program.

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