‘Mandatory’ Forum Selection Clause Given Cramped Construction By IL Court (applying Ohio Law) in Hand Lotion Contract Spat

In my experience, when final contracts refer to earlier agreements between the parties, it can present fertile ground for textual conflicts.  Example: I once litigated a severance dispute where the operative employment agreement provided Delaware law (and fixed venue there, too) and incorporated two prior non-compete agreements.  One agreement contained a Nebraska forum clause while the other non-compete said New York law governed.  Much ink was spilled fleshing out the proper place to sue.

Sloan Biotechnology Laboratories, LLC v. Advanced Biomedical Inc., 2018 IL App (3d) 170020 examines the factors a court considers when deciding which of two paradoxical forum clauses apply.

The plaintiff there agreed to supply hand sanitizer product to the defendant pursuant to a 2015 Manufacturing Agreement (“2015 Agreement”). The 2015 Agreement incorporated a 2014 non-disclosure agreement (the “2014 NDA”)

The 2015 Agreement provided that Illinois law applied and identified Peoria, Illinois as the site of the contract. The incorporated 2014 NDA, in turn, contained both permissive and mandatory forum selection clauses, both of which fixed venue in Cuyahoga County, Ohio. The permissive forum clause simply stated Ohio law would govern and that it (the 2014 NDA) “may be enforced” in Ohio state court. The mandatory clause, found in the 2014 NDA’s “equitable remedies” section, provided that the scope and extent of any injunctive relief “shall be determined” by Cuyahoga County, Ohio state court. The trial court granted the Ohio defendant’s motion to dismiss the complaint and found that Ohio was the proper forum for the lawsuit. The plaintiff appealed.

Applying Ohio law, the Illinois appeals court reversed.  It first recognized the existence of both permissive and mandatory forum selection clauses. The former allows parties to submit their disputes to a designated forum but doesn’t prohibit litigation elsewhere. The latter, mandatory provision, provides the exclusive forum for litigation. Use of the word “may” denotes a permissive forum clause while “shall” signifies a mandatory one. [⁋ 26]

In Ohio, a forum selection clause brokered between two sophisticated commercial entities is prima facie valid, so long as it was bargained for freely. To set aside a commercial forum selection clause, the challenger must make a “strong showing.”

A court will reject a commercial forum selection clause where (1) it results from fraud or overreaching or (2) its enforcement is unreasonable and essentially deprive a party of its day in court.

However, a challenger’s bare allegation that it’s inconvenient to litigate in another state isn’t enough to nullify a freely bargained for forum selection clause.

Like Illinois, Ohio utilizes the four-corners rule to contract interpretation. That is, contractual terms are to be ascribed their common, ordinary meanings and a court will not go beyond the plain language (or “four corners”) of the document to divine its meaning.

Applying these principles, the Court noted that the mandatory forum clause was narrowly drafted and only applied to questions of injunctive relief for NDA violations.  And since plaintiff’s lawsuit was not premised on a violation of the 2014 NDA (it was a declaratory judgment suit), the mandatory forum selection clause didn’t apply. As a consequence, the appeals court held there was nothing preventing the plaintiff from suing in Peoria County Illinois.

Afterwords:

Sloan represents a court rigidly enforcing a forum selection clause where the contracting parties are commercially sophisticated entities and there is no fraud or defect in contract formation.

The party challenging a forum clause must make a strong showing and offer more than inconvenience as the reason to reject the clause.

This case and others like it starkly illustrate the confusion that can result when multiple contracts (with diffuse forum clauses) reference and adopt each other.

If the different agreements involved here contained some forum consistency, a lot of time and money on a satellite issue (where to file suit) likely could have been saved.

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PaulP

Litigation attorney at Kanaris Stubenvoll & Heiss, P.C. representing businesses and individuals in post-judgment enforcement, collections and real estate litigation.