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IFC Credit Corp. v. Aliano Brother General Contractors

February 1, 2006


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 04 C 6504-John W. Darrah, Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.


Before POSNER, EVANS, and WILLIAMS, Circuit Judges.

We are asked to decide the validity of a forum selection clause that appears in the following provision of a contract between NorVergence, Inc. and Aliano (our collective name for the two defendants- a corporation and one of its co-owners, who personally guaranteed the corporation's debts):

This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which Rentor's principal offices are located or, if this Lease is assigned by Rentor, the State in which the assignee's principal offices are located, without regard to such State's choice of law considerations and all legal actions relating to this Lease shall be venued exclusively in a state or federal court located within that State, such court to be chosen at Rentor or Rentor's assignee's sole option. You hereby waive right to a trial by jury in any lawsuit in any way relating to this rental.

The contract is for the lease of telecommunications equipment by NorVergence to Aliano, a construction company, for five years at an annual rental of about $20,000. The contract authorizes NorVergence to assign the contract-and note that in the provision quoted above, Aliano consents to be sued in state or federal court either in the state in which NorVergence had its headquarters (New Jersey, which is also Aliano's state), or, if NorVergence assigns the contract, in a state or federal court in the state in which the assignee is headquartered.

As soon as Aliano signed the contract, NorVergence assigned it to IFC, the plaintiff, which is headquartered in Illinois. Aliano defaulted on its lease payments, and IFC brought this diversity suit in a federal district court in Illinois to collect them. Aliano moved to dismiss the suit for lack of personal jurisdiction, as Aliano has no presence in Illinois or other contacts with the state. The judge granted the motion on the ground that the forum selection clause is invalid and so is not an effective waiver of Aliano's objection to personal jurisdiction. IFC appeals the dismissal of its suit. The assignee of many of NorVergence's leases, IFC has been involved in a number of lawsuits in different state and federal courts in which the validity of the same forum selection clause has been challenged. The courts have divided over its validity, but with the tide running against. Compare IFC Credit Corp. v. Burton Industries, Inc., No. 04 C 5906, 2005 WL 1243404, at *2-3 (N.D. Ill. May 12, 2005), upholding its validity, with IFC Credit Corp. v. Warner Robbins Supply Co., No. 04 C 6093, 2005 U.S. Dist. LEXIS 26450, at *9-11 (N.D. Ill. Oct. 26, 2005); IFC Credit Corp. v. Century Realty Funds, Inc., No. 04 C 5908, slip op. at 7-8 (N.D. Ill. Mar. 4, 2005); IFC v. South Coast Dental Labs, No. 04 M3 2646, slip op. at 15-21 (Ill. Cook Cty. Cir. Ct. June 21, 2005); IFC v. Main Street Mortgage, No. 04 M3 2649, slip op. at 15-19 (Ill. Cook Cty. Cir. Ct. Mar. 30, 2005), and IFC v. Thomas Printing, Inc., No. 04 M3 2654, slip op. at 2-4 (Ill. Cook Cty. Cir. Ct. Mar. 17, 2005), all holding it invalid, and with IFC Credit Corp. v. Kay Automotive Distributors, Inc., No. 04-5907, slip op. at 1-2 (N.D. Ill. June 13, 2005); IFC Credit Corp. v. Austin Automotive Warehouse Corp., No. 04-8030, slip op. at 2-4 (N.D. Ill. Apr. 6, 2005), and IFC Credit Corp. v. Eastcom, Inc., 2005 WL 43159, at *1-3 (N.D. Ill. Jan. 7, 2005), expressing skepticism about its validity. The decisions that hold the clause invalid or express skepticism about its validity invariably do so on the ground that the clause is not specific; that is incorrect, as we shall see.

A threshold question is whether federal or state law governs the issue of validity. Had the district judge been asked to transfer the case to the federal district court in New Jersey, where IFC could obtain personal jurisdiction over Aliano without having to rely on the forum selection clause, the validity of the clause would plainly be governed by federal law. For in Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), the Supreme Court held that even in a diversity case the federal forum non conveniens statute, 28 U.S.C. § 1404(a), in providing that "for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought," allows the federal district court to give weight to a forum selection clause whether or not the clause would be deemed valid by the state in which the suit was brought. Stewart tells the district court to consider the policy behind the state's judgment of validity or invalidity because that policy would bear on whether transferring the case would be "in the interest of justice," but to make an independent judgment whether to enforce the clause and therefore refuse to transfer. 487 U.S. at 30-31; Northwestern National Ins. Co. v. Donovan, 916 F.2d 372, 373-74 (7th Cir. 1990); Jumara v. State Farm Ins. Co., 55 F.3d 873, 877-78 (3d Cir. 1995).

But in this case there was no transfer order, hence no occasion to apply section 1404(a). Should that change the result? If the dismissal of the suit stands, IFC will refile it in New Jersey, just as if a transfer order had been issued. If the suit belongs in Illinois, in the sense that had a motion to transfer been filed it should have been denied, the suit belongs in this state, one might think, whether or not such a motion is filed.

A court system has an independent interest in deciding which court in the system shall hear which cases, to minimize imbalances in workload. Stewart Organization, Inc. v. Ricoh Corp., supra, 487 U.S. at 30-31. Shall it be a federal district court in Illinois or the one in New Jersey? As Justice Kennedy emphasized in his concurrence in Stewart, 487 U.S. at 33, and later cases confirm as we are about to see, federal courts are friendly to the use of forum selection clauses to determine which federal district court shall host a case. That policy might well seem as applicable to the present case as to one in which a motion to transfer is filed, though dismissal and transfer do not have identical effects. Dismissal is appealable, transfer not; the choice of law rules are different; and of particular relevance to the present discussion, if the dismissal of IFC's suit stands, IFC might decide to refile the suit in a New Jersey state court rather than in the federal court in New Jersey.

Several of the federal circuits have concluded that federal law indeed governs the validity of forum selection clauses (even) in diversity suits not involving a motion under section 1404(a). E.g., Jumara v. State Farm Ins. Co., supra, 55 F.3d at 877-78; Jones v. Weibrecht, 901 F.2d 17, 19 (2d Cir. 1991); Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 513 (9th Cir. 1988). But none of them has considered whether their conclusion should hold when the clause is invoked, as in this case, in an attempt to obtain personal jurisdiction that would otherwise be unobtainable. Other courts, including our own, have reserved the question whether federal law governs other than in the specific context exemplified by the Stewart case, that is, other than in cases in which the determination of validity is incidental to the application of the forum non conveniens statute. E.g., Northwestern National Ins. Co. v. Donovan, supra, 916 F.2d at 373-74; Rainforest Café, Inc. v. EklecCo, L.L.C., 340 F.3d 544, 546 (8th Cir. 2003).

When as in the present case the issue is not the convenience of the forum selected by the plaintiff but whether the forum has personal jurisdiction over the defendant by virtue of a forum selection clause, application of federal law would collide with the countless decisions that hold that in a diversity case a federal court has personal jurisdiction over a defendant "only if a court of the state in which [the federal court] sits would have jurisdiction." Purdue Research Foundation v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 779 (7th Cir. 2003); to the same effect, see, e.g., Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002); Michael J. Neuman & Associates v. Florabelle Flowers, 15 F.3d 721, 724 (7th Cir. 1994); Miller Yacht Sales, Inc. v. Smith, 384 F.3d 93, 96 (3d Cir. 2004); Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 99 (2d Cir. 2000); compare ISI Int'l, Inc. v. Borden Ladner Gervais LLP, 256 F.3d 548, 550-51 (7th Cir. 2001) (different rule in federal-question cases). If federal law governs the validity of the clause, this is an invitation to forum shopping, as the state courts might dismiss a case, holding the clause invalid and having no other basis ("minimum contacts") for asserting personal jurisdiction, while a federal district court in the same state would hold the clause valid and so retain the case. See Alexander Proudfoot Co. World Headquarters L.P. v. Thayer, 877 F.2d 912, 918-19 (11th Cir. 1989). Of course, as Justice Scalia argued in his vigorous dissent in Stewart, 487 U.S. at 39-40, Stewart too is an invitation to forum shop, but an invitation tendered, so at least the majority held, by section 1404(a), which is not in play in a case such as this.

It seems that either position is arbitrary. If federal law governs, an arbitrary difference between a federal and a state litigation is created. If state law governs, an arbitrary difference between a dismissal (followed by a refiling) and a transfer is created. Prudence in this situation counsels us to reserve decision and instead consider how the appeal would be decided under either view and hope that the result will be the same.

If the issue of the validity of the forum selection clause is governed by federal law, Aliano hasn't a chance. The attitude of this circuit toward the validity issue was made clear in Northwestern National Ins. Co. v. Donovan, supra, where, citing the Supreme Court's decision in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), and an earlier decision by this court, we said that "those decisions bury the outmoded judicial hostility to forum selection clauses. They make clear that since a defendant is deemed to waive (that is, he forfeits) objections to personal jurisdiction or venue simply by not making them in timely fashion, a potential defendant can waive such objections in advance of suit by signing a forum selection clause. Their approach is to treat a forum selection clause basically like any other contractual provision and hence to enforce it unless it is subject to any of the sorts of infirmity, such as fraud and mistake, that justify a court's refusing to enforce a contract." 916 F.2d at 375. Freedom of contract requires no less. Potential defendants would not agree to the inclusion of such a clause in their contracts if they thought it would put them at a disadvantage should the parties have a dispute that resulted in litigation, unless they were compensated for assuming that risk. If as seemed apparent in Northwestern as in the ...

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