SC Lawyer, May 2009, #3. Solving a Jurisdictional Mystery : No Easy Way to Decipher South Carolina's Approach to Forum Selection Clauses.

• Author: By John D. Martin and Derek A. Shoemake

South Carolina Lawyer

2009.

SC Lawyer, May 2009, #3.

Solving a Jurisdictional Mystery : No Easy Way to Decipher South Carolina's Approach to Forum Selection Clauses

South Carolina LawyerMay 2009Solving a Jurisdictional Mystery : No Easy Way to Decipher South Carolina's Approach to Forum Selection ClausesBy John D. Martin and Derek A. ShoemakeYou represent Georgia Farms, a Georgia corporation that has a $100,000 contract with S.C. Groves, a South Carolina corporation. The companies negotiated a forum selection clause to litigate any dispute in a Georgia federal court under Georgia law. However, S.C. Groves just filed suit in a South Carolina state court, and Georgia Farms calls you immediately. Although the company concedes it is otherwise subject to jurisdiction in South Carolina, it wants the court to enforce its forum selection clause, and it asks you to take appropriate action. Prepare yourself. You are about to enter a jurisdictional Twilight Zone.

S.C. Supreme Court's conflicting positions

To paraphrase Winston Churchill, South Carolina's stance on the enforceability of forum selection clauses is a riddle, wrapped in a mystery, inside an enigma. South Carolina appellate courts have not plainly addressed whether these jurisdictional agreements violate state public policy, and the inconsistent case law on point has led to conflicting decisions in South Carolina federal courts.

In 2006, the S.C. Supreme Court issued its two most recent rulings discussing forum selection clauses, authored by the same justice and decided on the same day, with wildly divergent dicta. SeeJohnson v. Key Equip. Fin., 367 S.C. 665, 627 S.E.2d 740 (2006); Minorplanet Sys. USA Ltd. v. Am. Aire, Inc., 368 S.C. 146, 628 S.E.2d 43 (2006). In Key Equipment Finance, the S.C. Supreme Court explained that South Carolina "general[ly] disfavor[s] forum selection clauses." 367 S.C. at 668, 627 S.E.2d at 741-42. However, in American Aire, the Court noted, "Under South Carolina law, a consent to jurisdiction clause is generally presumed valid and enforceable when made at arm's length by sophisticated business entities." 368 S.C. at 150 n.1, 628 S.E.2d at 45 n.1 (citations omitted).

A statutory answer?

Interestingly, neither Key Equipment Finance nor American Aire analyzed the relevance of S.C. Code § 15-7-120, which specifically addresses forum selection clauses. That statute states:

Notwithstanding a provision in a contract requiring a cause of action arising under it to be brought in a location other than as provided in this title and the South Carolina Rules of Civil Procedure , the cause of action alternatively may be brought in the manner provided in this title and the South Carolina Rules of Civil Procedure for such causes of action. S.C. Code Ann. § 15-7-120(A) (2008). Unfortunately, none of the statute's legislative history discusses the impetus for this section. A 1995 case from the court of appeals stands alone as the only published state court decision to examine this statutory provision.

In Johnson v.Paraplane, the plaintiff injured his leg in Horry County, South Carolina, while piloting one of the defendant's paraplanes. 319 S.C. 247, 249, 460 S.E.2d 398, 399 (Ct. App. 1995), vacated on other grounds, 321 S.C. 316, 468 S.E.2d 620 (1996). The plaintiff sued in Horry County, and the defendant maintained that the court lacked jurisdiction because the parties had agreed to bring any legal action in a New Jersey state court. Id. The defendant argued that because § 15-7-120(A) appeared in the venue chapter of the S.C. Code, the statute applied only to venue and not to its jurisdiction agreement with the plaintiff. Id. at 250, 460 S.E.2d at 400. After rejecting this argument, the court flatly declared that "absent the contract provision, this action was properly brought in Horry County. Thus, it may be brought there under § 15-7-120(A) " Id.

Incongruity at the S.C. Court of Appeals

The court in Paraplane did not hold that forum selection clauses violate South Carolina public policy. In Firestone Financial Corp. v. Owens, decided two years after the South Carolina legislature enacted § 15-7-120, the court of appeals ordered a lower court to enter a previous Massachusetts judgment against Owens because she "waived her right to be sued in South Carolina by consenting that the action would be tried in the State of Massachusetts." 309 S.C. 73, 75-76, 419 S.E.2d 830, 831 (Ct. App. 1992). See alsoRepublic Leasing Co., Inc. v. Haywood, 329 S.C. 562, 495 S.E.2d 804 (Ct. App. 1998) (holding that forum selection clauses "are prima facie valid and enforceable when made at arm's length by sophisticated business entities"), vacated on other grounds, 335 S.C. 207, 516 S.E.2d 441 (1999).

These cases put a party filing suit, like S.C. Groves in the hypothetical, at a major strategic advantage. Under the reasoning in Paraplane, a party can retain the right to sue in South Carolina in spite of a forum selection clause. On the other hand, under the reasoning in Firestone Financial, a party can lose the right to be sued in South Carolina because of a forum selection clause. This paradox, coupled with the state Supreme Court's differing approaches to forum selection clauses, has fueled a considerable split in South Carolina district courts.

Federal district court division

For both practical and legal reasons, a discussion of forum selection clauses in South Carolina must include South Carolina federal courts. Practically, many cases involving these clauses end up in federal court by way of diversity jurisdiction. A contract that includes a forum selection clause often involves parties of diverse citizenship, and many of these contracts involve amounts over $75,000. See 28 U.S.C. § 1332(a). Additionally, a party seeking to enforce a forum selection clause is likely an out-of-state defendant who might remove the case to the more familiar federal court system and seek transfer to the jurisdiction anticipated in the forum selection clause.

Federal law generally governs forum selection clauses, but South Carolina federal courts hearing cases involving forum selection clauses often must look to the substantive law of South Carolina. See, e.g.,

Atl. Floor Servs., Inc. v. Wal-Mart Stores, Inc., 334 F. Supp. 2d 875, 877 (D.S.C. 2004). Although district courts presume the clauses are valid, a court may find the clauses unreasonable if

(1) their formation was induced by fraud or overreaching; (2) the complaining party 'will for all practical purposes be deprived of his day in court' because of the grave inconvenience or unfairness of the selected forum; (3) the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy; or (4) their enforcement would contravene a strong public policy of the forum state.Id. (citing M/S Bremen v. Zapata Off-Shore Co., 401 U.S. 1, 10 (1972)) (emphasis added). South Carolina federal courts have had particular difficulty in trying to glean the state's public policy toward forum selection clauses. Under analogous facts, some federal judges have found forum selection clauses valid, while others have found they contravene South Carolina public policy. Judges Henry M. Herlong and R. Brian Harwell have written recent and in-depth opinions on each side of the issue, and their analyses are instructive.

Herlong approach: forum selection clauses contravene S.C. public policy

In Consolidated Insured Benefits, Inc. v. Conseco Medical Insurance Co. (Consolidated I), the parties had agreed to the jurisdiction of an Indiana state court, but Consolidated, a South Carolina corporation, sued Conseco in South Carolina. 370 F. Supp. 2d 397, 399 (D.S.C. 2004). Judge Herlong denied Conseco's motion to reconsider a previous order, which in turn denied Conseco's motion to dismiss or transfer the case pursuant to the forum selection clause. Id. at 398.

Judge Herlong held that § 15-7-120(A) evidenced a strong South Carolina public policy against forum selection clauses. Id. at 401. He outlined several reasons for this finding: Paraplane shows that the South Carolina courts broadly interpret § 15-7-120(A) to disfavor forum selection clauses. Id. He added that "the statute embodies South Carolina's policy against forum selection clauses by what it expressly allows." Id. Contrary to Conseco's argument, Judge Herlong reasoned the statute applies to out-of-state forum selection clauses because it does not expressly limit itself to intra-state clauses, and the second section of the statute, § 15-7-120(B), which covers arbitration agreements, specifically deals with agreements that require out-of-state arbitration. Id. at 402. Any South Carolina case decided before the 1990 enactment of § 15-7-120 is not persuasive because it fails to consider the public policy against forum selection clauses embodied in the statute. Id. at 401. Most South Carolina appellate court cases decided after 1990 are also unpersuasive because they addressed situations in which the plaintiff initially brought the case in the agreed-upon forum.

Id. Section 15-7-120 does not prohibit this; it simply allows a plaintiff to bring the case in South Carolina. Id. at 401-02.

In 2007, three years after Consolidated I and one year after the S.C. Supreme Court's mixed messages in American Aire and Key Equipment Finance, Judge Herlong again denied a party's motion to dismiss pursuant to a forum selection clause. In Spinks v. The Krystal Co., the parties agreed to litigate any dispute arising from their franchise agreements in Tennessee. No. 6:07-2619-HMH, 2007 WL 2822788, at *1 (D.S.C. Sept. 26, 2007). When Spinks, a South Carolina resident, sued in South Carolina, The Krystal Co. removed the case to federal court and filed a motion to dismiss. Id. at *2.

Although Judge Herlong acknowledged that other district court cases had held that § 15-7-120 does not evidence a strong public policy against enforcement, and that no South Carolina court had explicitly articulated the state's public policy, he used the rationale from Consolidated I to explain that South Carolina public policy is embedded in the express text of § 15-7-120. Id. at *3-*4.

Other South Carolina federal judges have also found South Carolina public policy weighs against forum selection clauses. In 2001, Judge William O. Bertelsman, sitting by designation in Insurance Products Marketing, Inc. v. Indianapolis Life Insurance Co., held that § 15-7-120's broad wording meant that "the legislature of South Carolina did not agree with the federal courts' favorable view of forum selection clauses and desired to insulate South Carolina litigants from their effect." 176 F. Supp. 2d 544, 550 (D.S.C. 2001). In 2006, Judge Patrick Michael Duffy, in applying federal law to a maritime claim, noted "it is clear that the federal rule favoring the enforcement of forum selection clauses is directly in conflict with South Carolina's 'general disfavoring' of such clauses." Tetrev v. Pride Intern., Inc., 444 F. Supp. 2d 524, 528 (D.S.C. 2006).

Harwell approach: S.C. public policy permits forum selection clauses

In the same year that Judge Herlong ruled against the enforceability of forum selection clauses in Consolidated I, Judge Harwell found that South Carolina courts do not have a strong public policy against forum selection clauses and granted a party's motion to dismiss. Atl. Floor Servs., Inc. v. Wal-Mart Stores, Inc., 334 F. Supp. 2d 87, 880 (D.S.C. 2004).

In Atlantic Floor Services, a corporation sued in South Carolina, although it had a contractual agreement with Wal-Mart to sue in Arkansas. Id. at 877. In granting dismissal, Judge Harwell outlined the following reasons why forum selection clauses did not defy South Carolina public policy:

A state's mere disfavor of forum selection clauses "is not sufficient to rebut the strong federal policy in favor" of them. Id. at 879 (citing Stewart Org. v. Ricoh Corp., 487 U.S. 22, 31 (1988)). Section 15-7-120(A) appears to apply to intra-state forum selection clauses because the statute is in the last section of the Code chapter regarding venue for actions brought in state courts. Id. South Carolina courts have upheld forum selection clauses in a variety of circumstances. Id. Judge Harwell relied in part on St. John's Episcopal Mission Center v. S.C. Department of Social Services, a case decided before the legislature enacted § 15-7-120. 276 S.C. 507, 280 S.E.2d 207 (1981). In that case, the S.C. Supreme Court enforced an intra-state forum selection clause where the parties had agreed to jurisdiction in Richland County but one party filed in Charleston County. Id. at 509, 280 S.E.2d at 207.

Judge Harwell also endorsed the enforceability of forum selection clauses in 2006 when Consolidated appealed Judge Herlong's order from Consolidated I. SeeConsolidated Insured Benefits, Inc. v. Conseco Med. Ins. Co. (Consolidated II), No. 6:03-3211-RBH, 2006 WL 2864425, at *1 (D.S.C. Oct. 4, 2006). Although affirming Judge Herlong's order on other grounds, Judge Harwell reinforced the foundation of his holding in Atlantic Floor Services. Id. at *4.

In Consolidated II, Judge Harwell examined the contradiction between Key Equipment Finance, which observed that South Carolina disfavors forum selection clauses, and American Aire, which said the clauses were generally valid. Id. See also Johnson v. Key Equip. Fin., 367 S.C. 665, 627 S.E.2d 740 (2006); Minorplanet Sys. USA Ltd. v. Am. Aire, 368 S.C. 146, 628 S.E.2d 43 (2006). Under Judge Harwell's reasoning, at worst, this analytical inconsistency was too speculative to rebut the federal presumption in favor of forum selection clauses and, at best, bolstered the argument that forum selection clauses were acceptable under South Carolina public policy. Id. at *5.

At least three other South Carolina federal judges have agreed with Judge Harwell's reasoning. In 2006, Judges Terry L. Wooten and Margaret B. Seymour both held that South Carolina public policy does not prohibit enforcing forum selection clauses. See Power-Linx, Inc. v. Satius, Inc., No. 4:05-CV-3281-TLW, 2006 WL 2038263, at *2 (D.S.C. July 20, 2006) (relying specifically on Judge Harwell's decision in Atlantic Floor Services to enforce clause); Gregg v. GI Apparel, Inc., No. 3:05-2399-MBS, 2006 WL 346423, at *2 (D.S.C. Feb. 14, 2006) ("South Carolina appellate courts have never suggested that forum selection clauses violate the public policy of South Carolina.").

As of January 2009, the last word on forum selection clauses from the South Carolina federal bench rang in support of Judge Harwell's analysis. In Palmetto Bank v. BankFirst, Judge G. Ross Anderson relied in part on Atlantic Floor Services in succinctly holding that "[t]here is not a strong public policy against forum selection clauses in South Carolina." No. 6:08-cv-4072-GRA, 2009 WL 212417, at *3 (D.S.C. Jan. 28, 2009).

What about Georgia Farms?

Looking back to the hypothetical from the beginning of the article, unfortunately you have no easy answer for Georgia Farms, your out-of-state client seeking to enforce the forum selection clause. In a state court, Georgia Farms faces both uncertainty and unpredictability. It could rely on state cases like American Aire and Firestone Financial to argue that South Carolina courts enforce forum selection clauses, especially those entered into between business entities after negotiation. Unfortunately, Georgia Farms' situation is factually similar to Paraplane, in which the S.C. Court of Appeals ruled that § 15-7-120 allowed a plaintiff to file suit in South Carolina regardless of the parties' forum selection clause.

In a South Carolina federal court, Georgia Farms faces greater predictability. Of the South Carolina federal judges who have considered the issue, most have adopted the Harwell approach and held that forum selection clauses do not contravene South Carolina public policy. However, at least two South Carolina federal judges have adopted some version of the opposing Herlong approach, and several judges have not weighed in one way or the other. On the surface, litigation in federal court may be a safer bet for Georgia Farms, but the company will still be wading into uncertainty.

Other important considerations

Whether Georgia Farms ends up in a South Carolina federal or state court, it must consider a number of other relevant issues: Motions to dismiss may be procedurally defective. The defendant in Atlantic Floor Services removed the case from state to federal court, where Judge Harwell granted its motion to dismiss. 334 F. Supp. 2d at 876. However, in Palmetto Bank, Judge Anderson granted a transfer but denied the defendant's motion to dismiss because "[a]fter removal, the defendant cannot allege that venue is inappropriate as they have waived the right to contest venue " 2009 WL 212417, at *1. If a forum selection clause places jurisdiction in another state's federal court, a motion to transfer under 28 U.S.C. § 1404(a) may be a viable alternative to a motion to dismiss. In a motion to transfer, the existence and validity of a forum selection clause is one of several factors that weigh in favor of transfer. SeeConsolidated I, 370 F. Supp. 2d at 402-03. However, both Judges Harwell and Herlong have held that transfer is unavailable under the plain language of § 1404(a) when the forum selection clause identifies a non-federal forum. See Consolidated II, 2006 WL 2864425, at * 2. Non-negotiated forum selection clauses may face greater uncertainty. The South Carolina cases that enforced or endorsed forum selection clauses dealt with provisions that "were made at arm's length by sophisticated business entities." American Aire, 368 S.C. at 150, 628 S.E.2d at 45 n.1 (citing Security Credit Leasing, Inc. v. Armaly, 339 S.C. 533, 529 S.E.2d 283 (Ct. App. 2000); Republic Leasing Co., Inc. v. Haywood, 329 S.C. 562, 495 S.E.2d 804 (Ct. App. 1998), vacated on other grounds, 335 S.C. 207, 516 S.E.2d 441 (1999)).

Conclusion

In South Carolina federal courts, the Harwell approach of enforcing forum selection clauses seems to be carrying the day. Nonetheless, until a South Carolina appellate court issues a ruling on point, attorneys with clients like Georgia Farms or S.C. Groves will not be able to solve the riddle of whether their forum selection clauses violate South Carolina public policy. Still, as long as attorneys keep abreast of the emerging trends in both federal and state courts, the riddle will at least become less of an enigma.

John D. Martin is a partner with Nelson Mullins Riley & Scarborough in Columbia. Derek A. Shoemake is a third-year student at the University of South Carolina School of Law.