There are no direct flights and 1,505 miles between Killeen, Texas, and Virginia Beach, Va., the base cities of J-Crew Management Inc. and Atlantic Marine Construction Inc., respectively. J-Crew says Atlantic Marine owes it $160,000 for work it performed as a subcontractor on a $7.4-million child development center in 2011 at Fort Hood, near Killeen. Instead of suing in Virginia, which its contract requires, J-Crew sued in federal court near the U.S. Army base. A federal appeals-court judge in Austin upheld J-Crew's right to sue in its home state.
Forum or venue selection matters a great deal in murder and other trials that can inflame public passions. It also matters in construction, because companies prefer to plead their case where they employ staff or donate to local civic causes. "You do the dance where you want to be," says Gina Vitiello, a shareholder with attorney Chamberlain, Hrdlicka. The Atlanta-based firm has no role in the case.
To gain the advantage—and discourage subs from suing at all—prime contractors frequently insert clauses in contracts requiring disputes to be tried in the prime's home state. Subcontractors often fight it by suing on their home turf anyway. The case of Atlantic Marine Construction Co. Inc. v. U.S. District Court for the Western District of Texas, now in the U.S. Supreme Court, could change those strategies.
Oral arguments were scheduled for Oct. 9 in Atlantic Marine's attempt to overturn the Texas federal appeals court decision to allow J-Crew to pursue its claims in the Texas federal court. The U.S. Chamber of Commerce has filed a friend-of-the-court brief on behalf of Atlantic Marine; the American Subcontractors Association has filed one for J-Crew.
Atlantic Marine, whose managers could not be reached for comment, dwarfs J-Crew in size: It has 40 employees, compared to J-Crew's four or five. The prime contractor argued in its key brief to the Supreme Court that contract clauses between private parties should be respected and that the burden should be on any party that wants to change the specified venue. Allowing one party to easily change forum will encourage "forum-shopping," creates incentives to breach contracts and "sets up a race to the courthouse," according to Atlantic Marine's petition.
In other words, the Texas federal judges overstepped their discretion in allowing J-Crew to sue in Texas.
But the federal commercial code gives judges that leeway and requires them to evaluate factors such as distance and convenience and what's in the contract. "The case pits the freedom to contract against congressional power that gives the court judge discretion to determine where disputes are heard," notes Joe R. Basham, an attorney for J-Crew's law firm, Allensworth & Porter, Austin.
Subcontractors have characterized forum-selection clauses as predatory. The subs have no choice but to accept them, they claim, given the power of the prime contractor and the small specialty contractor's urgent need for work in its home territory.
If Atlantic Marine wins, it will lock enforceable forum clauses into sub contracts. Not even the statutes on the books in 22 states limiting or voiding such clauses will prevent federal judges from upholding contracts.
"You will wipe those laws off the books for litigation in a federal court—that's what's scary," notes Eric B. Travers, an attorney in Columbus, Ohio, with Kegler, Brown, Hill & Ritter, which wrote ASA's brief on the case. A losing decision, Travers says, will waste "all the work to get the laws passed."