The Importance of Home Field Advantage: A Look at the Texas Supreme Court’s Recent Nationwide Opinion Addressing Forum Selection Clauses
July 27, 2016 by Brown Fox
Most contracts we sign in day-to-day business transactions contain a clause about forum selection. A “forum” is a jurisdiction identified by the contract in which any dispute regarding the contract must be litigated. Businesses insert mandatory forum selection clauses into contracts to ensure a favorable forum in the event of litigation. These favorable forums bestow e.g., a “home field advantage” or favorable jury pool, for the business. Think of it this way: Would the Yankees prefer to play the Red Sox at Yankee Stadium or Fenway Park? So goes the importance of certain forums for litigants.
Last month, the Texas Supreme Court issued a notable decision pertaining to the enforcement of mandatory forum selection clauses in contracts. The Court’s decision added great strength to these clauses, requiring both parties to pay greater attention to this often overlooked contractual clause. In this post I summarize the recent Texas Supreme Court Decision and its significance parties on both sides of the clause.
In In re Nationwide Ins. Co. of Am., No. 15-0328, 2016 WL 3537206 (Tex. June 24, 2016), the Texas Supreme Court chose to enforce a mandatory forum selection clause and dismiss the plaintiff’s lawsuit, even though the defendant waited over two years to seek to have the mandatory forum selection clause enforced. Moreover, the plaintiff had expended both time and resources litigating the lawsuit in the forum from which the lawsuit was dismissed, and by the time the Court issued its decision the limitations period for the plaintiff’s claims had expired.
Brian Besch, a former employee of the defendant, Nationwide Insurance Company, had an employment contract with Nationwide. After his employment with Nationwide ended, Besch brought suit against Nationwide in Travis County, Texas alleging, among other things, breach of his employment contract and fraud. However, the employment contract that Besch entered into with Nationwide contained a mandatory forum selection clause requiring that all suits under the contract provision invoked by Besch be brought in Franklin County, Ohio, the location of Nationwide’s headquarters. Nationwide ultimately filed a motion to dismiss Besch’s lawsuit based on the forum selection clause.
Contractual forum selection clauses are generally enforceable in Texas. However, Nationwide waited over two years from the filing of Besch’s lawsuit before seeking to have the mandatory forum selection clause enforced. The issue before the Court was whether Nationwide could still enforce the forum selection clause over two years into the litigation. During this two-year period, both Nationwide and Besch were active in the Texas litigation, expending time and resources litigating Besch’s lawsuit. For these reasons, Besch responded to Nationwide’s motion to dismiss arguing both that Nationwide waived its right to enforce the forum selection clause, and also that enforcement of the forum selection clause would prejudice Besch, as Besch’s breach of contract claim was now barred under Ohio law and Besch had already spent substantial time and resources litigating the Texas lawsuit.
Nationwide then notified Besch that it would waive its right to claim limitations as to Besch’s breach of contract claim, should Besch refile the claim in Ohio. Nationwide also pointed out to Besch that, at that time, his fraud claim was not yet barred under Ohio law, and therefore Nationwide would retain its right to claim that limitations barred Besch’s fraud claim should Besch not timely refile his lawsuit in Ohio. Besch chose to continue with his Texas lawsuit and to forego refiling the lawsuit in Ohio. Another lawsuit Besch is battling is the class action lawsuit for xarelto.
The trial court agreed with Besch’s position regarding the forum selection clause, and denied Nationwide’s motion to dismiss. The trial court’s decision was based on its finding that granting Nationwide’s motion to dismiss would prejudice Besch in two way. First, his breach of contract cause of action was by then barred by limitations in Ohio, and second, Besch had expended two years and incurred considerable costs in the Texas litigation.
Nationwide appealed the trial court’s decision, however the Court of Appeals denied Nationwide’s petition for writ of mandamus. During the pendency of the interlocutory appeal process, the limitations period in Ohio for Besch’s fraud claim also expired.
Nationwide then sought mandamus relief from the Texas Supreme Court. Unlike the Court of Appeals, the Texas Supreme Court granted Nationwide’s petition for writ of mandamus.
The Court noted that the test for determining whether Nationwide had waived its right to seek enforcement of the contractual mandatory forum selection clause, is that “‘[a] party waives a forum-selection clause by substantially invoking the judicial process to the other party’s detriment or prejudice’”, and specified that “substantial invocation and resulting prejudice must both occur to waive the right”. Id. at *3 (quoting In re ADM Inv’r Servs., Inc., 304 S.W.3d 371, 374 (Tex. 2010)). Accordingly, the Court held that a party who brings a suit in Texas in violation of a contractual mandatory forum selection clause must show that the clause has been waived, or that it is otherwise unenforceable to have it set aside.
The Court determined that Nationwide’s two-year delay in asserting the forum selection clause did not constitute waiver, stating that “delay alone is generally insufficient to establish waiver”. In re Nationwide Ins. Co. of Am., 2016 WL 3537206, at *3. The Court also noted that Besch had conceded that the “‘time, effort, and funds’ he expended in the Texas litigation are not the type of detriment ‘typically … deemed [ ]sufficient by Texas courts to avoid a forum-selection clause’”. Id. The Court agreed with this assessment and cited its earlier decision in In re Automated Collection Techs., Inc., in which it stated that a litigant who “chose to initiate proceedings in a forum other than the one to which it contractually agreed … cannot complain about any duplication of time or efforts that resulted from that choice”. In re Nationwide Ins. Co. of Am., 2016 WL 3537206, at *3 (citing In re Automated Collection Techs., Inc., 156 S.W.3d 557, 560 (Tex. 2004)). Thus, the Court determined that the parties’ involvement in the litigation up to that point in time did not constitute substantial invocation of the judicial process by Nationwide, or sufficient grounds to avoid the forum selection clause for Besch.
The Court also determined that Besch’s claim of prejudice regarding his breach of contract claim did not justify a refusal to enforce the forum selection clause. Instrumental in the Court’s decision was the fact that Nationwide waived its right to claim limitations as to Besch’s contract claim. The trial court had found that Nationwide’s two year delay was prejudicial because Nationwide’s assertion of its right under the forum selection clause came after the expiration of the limitations period on Besch’s breach of contract claim. In reversing the trial court’s decision, the Texas Supreme Court distinguished between actual and theoretical prejudice, noting that the prejudice to Besch of losing the ability to assert his breach of contract claim due to limitations was only theoretical, and not actual prejudice, because Nationwide had agreed to waive its right to claim limitations as to that claim. Thus, the Court found that the trial court abused its discretion in refusing to enforce the forum selection clause on this basis of Besch’s alleged prejudice.
The Court also found that Besch could not validly claim prejudice due to the fact that his fraud claim was now barred by limitations in Ohio, because Besch had a reasonable opportunity to preserve that claim in Ohio. The Court took note of the fact that Nationwide had “plainly put Besch on notice that he still had to deal with the upcoming expiration of Ohio’s tort statute of limitations” as it pertained to his fraud claim, however Besch chose to continue with the Texas litigation and forego refiling his lawsuit in Ohio. Id. at *5.
Thus, the Court concluded that “[b]ecause the party who initiated the Texas litigation failed to establish the mandatory forum-selection clause was waived or otherwise unenforceable, we conclude that the trial court abused its discretion by not enforcing it”. Id. at *1.
The Impact of Nationwide on Texas litigants:
If you are a Texas litigant who has signed a contract containing a mandatory forum selection clause, then the Court’s decision in Nationwide could affect you.
- The decision is a strong indicator that Texas courts will continue to enforce such contractual forum selection clauses, even if the party seeking to enforce the clause has engaged in behavior that could constitute a waiver of its right to enforcement.
- The decision highlights the high bar that a party must clear to show that the party will suffer prejudice from the enforcement of a contractual mandatory forum selection clause.
- A Texas litigant should thoroughly review the requirements found in the forum selection clause before filing a lawsuit for breach of a contract. If the forum selection clause requires that you file your breach of contract claim in a state other than Texas, you may be tempted to forego the cost and hassle of filing your lawsuit in a foreign jurisdiction, and instead file your lawsuit in a Texas court closer to home. While the desire to do so is understandable, should you fail to abide by the mandatory forum selection clause’s requirements, then like the plaintiff in Nationwide, you will be running the risk of wasting valuable time and resources filing your claim in a Texas court.
- Any business drafting contracts with forum selection clauses should spend extra time on the provision, as a well drafted mandatory forum selection clause likely will withstand attack.
- The Nationwide case also highlights the importance of taking into consideration the limitations period for your breach of contract action in the state designated by the forum selection clause. Like the plaintiff in Nationwide, filing your claim in a Texas court while ignoring the designated state’s limitations period could lead you to a dead end with no options.
In light of Nationwide, litigants should consult with litigation counsel to discuss forum selection options and rules from the outset. Likewise, businesses drafting forum selection clauses should spend the time on the front end ensuring the clause is well-crafted given the added strength from the Nationwide case.
Michael Hewitt is an Associate in Brown Fox’s Litigation and Trial Group.