Forum Selection Clauses: Introduction to Kelman
Sometimes appellate courts render opinions that helpfully explain somewhat complexed or arcane procedural rules. The Second Circuit’s decision in Rabinowitz v. Kelman, No. 22-1747, slip op. (July 24, 2023) is of this ilk, and is one that should be consulted not only when litigating forum-selection-related issues, but also for purposes of drafting forum selection clauses.
Kelman— which arose out of a petition filed in U.S. District Court for the Southern District of New York (the “SDNY”) to confirm a rabbinical arbitration award—addressed two issues: (1) whether the district court had subject matter jurisdiction where the amount of controversy and diversity of citizen requirements were met but the court was not one expressly contemplated by the forum selection clause; and (2) whether the forum selection clause was mandatory or permissive, that is, whether it required the action to be brought in one of the fora specified in the clause and no other.
The Court held that the district court had subject matter jurisdiction under the diversity jurisdiction (28 U.S.C. § 1332(a)(2)) because the petitioner adequately pleaded diverse citizenship and an amount in controversy in excess of $75,000, exclusive of interests and costs, and because the parties lacked the power to divest the court of subject matter jurisdiction by agreement, including by agreement to a forum selection clause.
It further held that the “forum selection clauses” were “permissive arrangements that merely allow litigation in certain fora, rather than mandatory provisions that require litigation to occur only there.” Slip op. at 32. Under a “modified forum non conveniens” analysis prescribed by the United States Supreme Court, the forum selection clauses did not bar litigation brought in the SDNY. Slip op. at 32. The Court accordingly vacated the district court’s judgment dismissing the case for lack of subject matter jurisdiction and remanded the case to the district court. Slip op. at 32.
Background
Kelman arose from a dispute over a Settlement Agreement under which Kelman was to pay Rabinowitz instalment payments totaling $5.2 million. The Settlement Agreement contained an arbitration clause (the “First Arbitration Agreement”) and a forum selection clause for litigation (the “Settlement Agreement Forum Clause”). The First Arbitration Agreement called for claims to be submitted “exclusively to binding arbitration[,]” which was to be “‘conducted’” by rabbinical arbitration before “Bais Din Maysharim” (the rabbinical court, which we refer to here as the “Bais Din”). Slip op. at 4-5 (quoting App’x 19).
The Settlement Agreement Forum Clause expressed the parties’ agreement “to be bound by the judgment of ‘any court having jurisdiction’ over the award and to ‘submit to the jurisdiction of the New Jersey State Courts located in Ocean County or the courts of Israel. . . .’” Slip op. at 5 & n.1 (quoting App’x 19).
But disputes arising out of the Settlement Agreement ensued and in June 2020 the parties executed another agreement, this one a new arbitration agreement the Bais Din recommended they sign (the “Second Arbitration Agreement”), and under which the parties submitted their Settlement Agreement dispute to arbitration before three Bais Din arbitrators. Slip op. at 5-6.
The Second Arbitration Agreement contained its own forum selection clause, which differed from the one in the Settlement Agreement (the “Second Arbitration Agreement Forum Clause”). It provided that an arbitration award “‘shall be enforceable in the courts in the State of New Jersey and/or New York[,]’” and that “[t]he Parties submit themselves to the personal jurisdiction of the courts of the State of New Jersey and/or New York for any action or proceeding to confirm or enforce a decree of the Arbitrators pursuant to. . . .’” New Jersey’s or New York’s arbitration statutes. Slip op. at 7 (quoting App’x 14, 16).
The Bais Din arbitrators issued an award on January 3, 2021 (the “Award”), which required “Kelman to ‘immediately pay’ $4,000,000.00.” op. at 7 (quoting App’x 11). The Award also directed Kelman to pay Rabinowitz “‘reasonable attorney’s wages,’” required Rabinowitz to “‘submit a record that delineates his hours,’” and provided that the Bais Din “‘will adjudicate on that.’” Slip op. at 7 (quoting App’x 11).
Rabinowitz filed on April 12, 2021 (more than three months after the delivery of the Award) a petition to confirm the Award in the SDNY and enter judgment for $4,000,000 against Kelman, plus attorney fees and costs. The petition alleged diversity jurisdiction under 28 U.S.C. § 1332 and proper venue under 28 U.S.C. § 1391. Slip op. at 7.
Kelman responded by moving to dismiss for alleged lack of subject matter jurisdiction based on the forum selection clauses in the Settlement Agreement and the Second Arbitration Agreement, and, alternatively, to vacate the award for lack of finality and on the ground the arbitrators exceeded their powers. Kelman’s arguments for vacatur were untimely under Federal Arbitration Act Section 12’s three-month deadline, and he therefore asserted that state law—under which the motion to vacate would be timely—not the FAA, should govern the enforcement of the award, including the motion to vacate. See slip op. at 8.
The district court dismissed the petition on July 13, 2022, for lack of subject matter jurisdiction. It did so because the district court interpreted the forum selection clause in the Second Arbitration Agreement to require litigation to be held in the New Jersey or New York state courts. The dismissal was without prejudice to refile their petition in the state courts of New Jersey or New York.
The dismissal left open the questions whether: (1) the Award was final; (2) the motion to vacate was timely; and (3) the arbitrators exceeded their authority. Slip op. at 9. The district court also did not discuss Rabinowitz’s request for attorney fees and costs. Judgment was entered on July 14, 2022, and the Second Circuit appeal ensued.
Forum Selection Clauses: The Kelman Court’s Decision
Rabinowitz contended on appeal that the district court erred by: (1) dismissing the case for lack of subject matter jurisdiction; and (2) interpreting the forum selection clause in the Second Arbitration Agreement to require Rabinowitz to bring suit in the New York and New Jersey state courts only. He further argued that the Court should require the district court to confirm the Award and to award him costs and attorney fees.
The District Court had Subject Matter Jurisdiction Notwithstanding any Forum Selection Clause
As readers know (e.g., here and here) the FAA does not confer federal question jurisdiction on a court – an independent basis for subject matter jurisdiction is required. See, e.g., Badgerow v. Walters, 142 S. Ct. 1310, 1314 (2022).
But diversity jurisdiction was “adequately pleaded” here. As the Court explained, “[u]nder 28 U.S.C. § 1332(a)(2), district courts have diversity jurisdiction over actions where (1) the matter in controversy exceeds $75,000, exclusive of interests and costs, and (2) the action is between citizens of a state and citizens of a foreign state (so long as the foreign citizen is not lawfully admitted for permanent residence in the United States and domiciled in the same state).” Slip op. at 11.
The amount in controversy was satisfied because the award was for $4,000,000.00 and there was diversity of citizenship “because Kelman is a citizen of the United States, and Rabinowitz is a citizen of the United Kingdom and Israel.” Slip op. at 11. Kelman did not dispute the citizenship allegations or contend “that he is lawfully admitted for permanent residence in the United States.” Slip op. at 11. The district court therefore had subject matter jurisdiction. Id.
The district court erred by finding that the forum selection clauses somehow stripped it of its subject matter jurisdiction. Parties do not have the power to “oust” a federal court of the subject matter jurisdiction constitutionally or statutorily conferred upon it. See slip op. at 12. The U.S. Supreme Court explained more than 50 years ago that “the notion that forum selection clauses ‘tend to “oust” a court of jurisdiction is hardly more than a vestigial legal fiction.’” Slip op. at 12 (quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12 (1972)). “The issue to be decided, properly framed, said the Court “‘is whether that court should have exercised its jurisdiction to do more than give effect to the legitimate expectations of the parties, manifested in their freely negotiated agreement, by specifically enforcing the forum clause.’” Slip op. at 12-13 (quoting M/S Bremen, 407 U.S. at 12).
The Forum Selection Clauses were Permissive and the District Court Therefore Erred by Holding that the SDNY was an Improper Forum
The Court next turned to whether the forum selection clauses required the case to be brought in a forum other than the SDNY. This prompted the Court to discuss what “the proper procedural mechanism” is for “dismissing a claim based on a forum selection clause[.]” Slip op. at 13.
The starting point for the analysis was Atlantic Marine Constr. Co. v. United States Dist. Court for the W. Dist. of Tex., 571 U.S. 49 (2013), which “held that ‘generally “the appropriate way to enforce a forum-selection clause pointing to a state or foreign forum is through the doctrine of forum non conveniens,” rather than Rule 12(b).’” Slip op. at 14-15 (quoting Martinez v. Bloomberg LP, 740 F.3d 211, 216 (2d Cir. 2014) (quoting Atlantic Marine, 571 U.S. at 60)). The doctrine of forum non conveniens permits a court to decline to hear a case even though the general venue statute (28 U.S.C. § 1391) authorizes the case to be brought in that forum and the court otherwise has personal and subject matter jurisdiction. See slip op. at 15 (citation omitted).
To assess a forum non conveniens argument “in a case that does not involve forum selection clauses” a court considers “‘(1) the deference to be accorded the plaintiff’s choice of forum; (2) the adequacy of the alternative forum proposed by the defendants; and (3) the balance between the private and public interests implicated in the choice of forum.’” Slip op. at 16 (quoting Fasano v. Yu Yu, 921 F.3d 333, 335 (2d Cir. 2019) (citation omitted)). Absent unnecessary burdens on defendants or the court, “‘the plaintiff’s choice of forum should rarely be disturbed.’” Slip op. at 16 (quoting Iragorri v. United Techs. Corp., 274 F.3d 65, 70 (2d Cir. 2001) (en banc) (quoting Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 507 (1947)).
But a modified analysis applies when the parties have agreed to a forum selection provision. Slip op. at 17. Under that analysis, the preference in favor of the plaintiff’s choice of forum no longer applies and is replaced by a presumption in favor of the forum specified in the forum clause. Slip op. at 17. But the presumption is not necessarily outcome determinative because the court may “decline to enforce a forum selection clause in the rare case where the resisting party satisfies the heavy burden of showing that ‘it would be unfair, unjust, or unreasonable to hold that party to his bargain.’” Slip op. at 17 (quoting M/S Bremen, 407 U.S. at 18).
To determine whether a forum clause is presumptively enforceable, however, the court undertakes a three-step analysis, asking: “(1) ‘whether the clause was reasonably communicated to the party resisting enforcement,’ (2) ‘whether the clause is mandatory,’ that is 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.’” Slip op. at 18 (quoting Martinez, 740 F.3d at 217 (quotations omitted)).
If the answer to all three questions is yes the clause is “‘presumptively enforceable,’” and the court asks a fourth question: “whether the resisting party has rebutted that presumption by ‘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.’” Slip op. at 18-19.
The Court explained that it applies an abuse of discretion standard of review when considering whether a district court properly applied the modified forum non conveniens analysis. Slip op. at 20. It also discussed in some detail the parameters of that standard of review and how it certain aspects of a decision may be entitled to more deference than others, depending on the degree of institutional competence of the district court and the court of appeals in deciding certain matters, and how no deference is accorded to questions of law. See slip op. at 20-22.
De novo scrutiny was appropriate in this case, said the Court, because the district court “dismissed the [p]etition based on a purely legal matter of contractual interpretation—namely, whether a forum selection clause was framed in mandatory terms and therefore required the parties to enforce the Arbitration Award in the state courts of New York or New Jersey.” Slip op. at 21-22.
The Court said it disagreed with the district court’s resolution of that legal question because “[i]n our reading, both forum selection clauses are merely permissive, allowing (but not requiring) litigation in certain fora.” Slip op. at 22. “For that reason alone,” explained the Court, “the forum selection clauses do not trigger dismissal under step two of the modified forum non conveniens framework, and there is no need for us to consider the other steps of that analysis.” Slip op. at 22.
The Court explained its conclusion about the permissive nature of the forum selection clauses in some detail, but we highlight only the main points below.
Difference between Permissive and Mandatory Forum Selection Clauses
As its name suggests, a “mandatory” forum selection clause requires actions to be brought exclusively in the designated forum or fora and in no other. A “permissive clause” “‘confers [personal] jurisdiction in the designated forum, but does not deny plaintiff his choice of forum, if [personal] jurisdiction there is otherwise appropriate.’” Slip op. at 23. To determine if a forum clause is mandatory, the Court ascertains whether it contains “specific language of exclusion.” Slip op. at 23 (citations omitted). Clauses without such exclusionary language are deemed to be permissive and therefore do not qualify for a presumption of enforceability. Slip op. at 23.
The Forum Clause in the Arbitration Agreement is Permissive
The Forum Clause in the Arbitration Agreement states, with italics added by the Court:
The decree of the Arbitrators shall be enforceable in the courts of the State of New Jersey and/or New York. . . . The Parties submit themselves to the personal jurisdiction of the courts of the State of New Jersey and/or New York for any action or proceeding to confirm or enforce a decree of the Arbitrators pursuant to NJSA 2A:24-1 et seq. and Article 75 of the New York Civil Practice Law and Rules.
Slip op. at 24 (quoting App’x 14, 16; emphasis added by Court).
The Court ruled that Arbitration Agreement’s Forum Clause, including the language italicized by the Court, is permissive, not mandatory. The italicized language “shall be enforceable” means only that an award is “capable of enforcement” in the specified fora, not that it is enforceable only in those fora. Slip op. at 24-25 (citations omitted). The second italicized portion of the clause— “submit themselves to the personal jurisdiction of the courts of the State of New Jersey and/or New York. . . .”—shows that the parties consented to personal jurisdiction in the specified fora, but the clause does not purport to bar the personal jurisdiction of any other forum that would otherwise have it. Slip op. at 25-27 (citations omitted). Courts can, said the Court, exercise personal jurisdiction over a defendant who has not consented to personal jurisdiction, provided there is a basis for doing so based on the defendant’s activity in the forum state. Slip op. at 26-27 (citations omitted). The Court added that Kelman cited “no authority for the proposition that parties can contractually eliminate a court’s personal jurisdiction over them.” Slip op. at 27.
For the same reasons, the Court rejected the district court’s ruling that the lack of any reference in the clause to federal courts means the parties intended to make New Jersey and New York state courts the exclusive fora. Slip op. at 27. It also rejected the argument that a permissive interpretation would render the references to New Jersey and New York law superfluous. Slip op. at 28. The parties consented to suit in the state courts of New Jersey and New York law, but did not “preclude other permissible fora[,]” or “specify the law to be applied in any other fora.” Slip op. at 28.
Finally, even if the Court were to interpret the Arbitration Agreement Forum Clause to be mandatory, then it said it “would nonetheless determine that the phrase ‘courts in the State of New Jersey and/or New York’ includes federal courts in the state of New York.” Slip op. at 28 (quoting App’x 14, 16; emphasis added by Court). This conclusion is supported by authority from other circuit courts of appeals construing the term courts “in” a state to mean both federal and state courts and courts “of” a state to mean only courts of the named state. Slip op. at 28-29 (citations and quotations omitted).
The Settlement Agreement Forum Clause is Permissive
The Court also analyzed the Forum Clause in the Settlement Agreement and found it, too, to be permissive. That clause states:
Any arbitration award of the Bais Din shall be final and binding on each of the Parties, their successors and personal representatives, and judgment may be rendered thereon in any court having jurisdiction thereof. The parties each hereby submit to the jurisdiction of the New Jersey State Courts located in Ocean County or the courts of Israel, as the case may be, for the enforcement of any arbitration award pursuant to this paragraph or for any equitable relief related to the rights and responsibilities contained in this Agreement.
Slip op. at 30 (quoting App’x 19; emphasis added by Court).
For essentially the same reasons it stated in interpreting the Arbitration Agreement Forum Clause, the Court found that the “submit to the jurisdiction of” language indicated that the parties consented to personal jurisdiction of the “New Jersey State Courts located in Ocean County or the courts of Israel. . . ,” but did not express an intent to exclude any other courts in which they would otherwise be subject to personal jurisdiction. See Slip op. at 30-31.
The Court found further support for its interpretation in the statement authorizing the rendering of judgment on an award “in any court having jurisdiction thereof.” Slip op. at 31. That “phrase [swept] in far more courts than those in Tom River or Tel Aviv[,]” said the Court.
Disposition on Appeal
Given its dismissal of the action, the district court left open other issues, including “(1) Rabinowitz’s request for attorney fees and costs, and (2) whether the Arbitration Award was final, Kelman’s motion to vacate was timely and the Bais Din [arbitrators] exceeded their authority.” Slip op. at 31. Vacating the district court’s judgment of dismissal, the court remanded those issues to the district court to decide on remand. See slip op. at 32-33.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that The Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.
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Tags: Abuse of Discretion, Arbitration Agreement, Atlantic Marine, Bais Din, Beth Din, Consent to Jurisdiction, Diversity, Forum Non Conveniens, Forum Selection, Kelman, M/S Bremen, mandatory, Motion to Dismiss, permissive, Personal Jurisdiction, Rabbinical Arbitration, Rabinowitz, Second Circuit, Settlement Agreement, Subject Matter Jurisdiction, Submit to Jurisdiction, Zapata
[…] See Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here). As many readers know (e.g., here, here, and here) the FAA does not confer federal question jurisdiction on a court – an […]