Tuesday, July 24, 2007

Forum Selection Clauses: The 2d Disses the 7th

Many commercial contracts have forum selection clauses, including those whose subject matter is intellectual property. In an attempt to overcome common law hostility to such clauses (based on a fear that they "ousted" courts of jurisdiction), the Supreme Court has encouraged enforcement of properly constituted and agreed-to clauses that place jurisdiction in foreign courts over the parties' disputes. (Whether those courts will agree to be so roped into the dispute is a different matter).

As concerns copyright infringement, one might think that the question the question of whether to enforce a forum selection clause in a federal court regarding an exclusively federal cause of action would be a matter of federal law, but the question is an open one, as seen in yesterday's opinion by the Second Circuit in Phillips v. Audio Active Limited. The lack of agreement doesn't end here: the courts don't agree on what standards to apply to determine whether claims may be said to be encompassed by forum selection clauses, while they routinely engage in Talmudic hairsplitting interpretations of whether particular claims are covered.

One sharp division is between the Second and the Seventh Circuits, compare Corcovado Music corp. v. Hollis Music Corp., 981 F.2d 619 (2d Cir. 1993)(Feinberg, J.) with Omron Healthcare, Inc. v. Maclaren Exports Ltd., 28 F.3d 600 (7th Cir. 1994)(Easterbrook, J.). Yesterday's Phillips decision continues the division, as well as adding to the mix a choice of law provision. (Omron
sent the case to the English High Court and assumed that court would apply U.S. law).

Phillips is a long opinion, certainly compared to Judge Easterbrook's succinct, easy-to-read Omron opinion. In brief, in Phillips, the Second Circuit held that a contract claim was covered by the forum selection clause, that a copyright infringement claim was not, and that pendent state claims were probably preempted. Plaintiff Phillips (a/k/a Peter Rock), entered into a recording contract covering two albums. The first album went off without a hitch, the second one was problematic, including his recording of 15 songs beyond what the contract required (at least as a minimum). The record label wanted to also release the (maybe extra) 15 songs, but Phillips refused, believing they were not ready yet. The label released them anyway and Phillips sued.

Defendants moved to dismiss on the basis of a forum selection clause that read: "The validity, construction, and effect of this agreement and any and all modifications hereof shall be governed by English law" -- the choice of law provision -- and "any legal proceedings that may arise out of it are to be brought in England" -- the forum selection clause. I italicized "arise out of" because court spent well over 6 pages on it, in a thoroughly unconvincing exegesis of whether there are meaningful differences between "arise out of," "arise in connection with," :arising in relation to," "arising under," and "arising from," to sample only a few. (Phillips is hardly alone in this exercise, as its citations to other opinions amply demonstrates). One purpose of the court's linguistic foray was to disagree once more with the Seventh Circuit's far simpler approach of boiling all such terminology down into a single inquiry of whether the dispute arguably depends on a construction of the agreement in which the forum selection clause is contained.

Instead, the Phillips court made the unsupported and amazing judgment that "we see no reason to presume the parties meant anything other than [Webster's Third New International Dictionary 117 (1981)] definition of the term: "to originate from a specified source." This presumption is not particular to the parties before the court; its applies to all parties. Leaving aside the utter absurdity of such an assumption, the definition is of no practical assistance, something quickly revealed by the court's failure to meaningfully employ in the case at bar. To be sure, the court states that the plaintiff's infringement claim doesn't originate from the recording contract (p.23), but the conclusion is based on deeply flawed premises. First the court framed the question as whether plaintiff's rights originated from the contract, and then answered that question in the negative. But obviously plaintiff's rights couldn't originate from the contract: he was the undisputed author of the works; the purpose of the contract was for him to assign away certain rights. On that point, defendants could claim that yes, he did, and that therefore the dispute was whether he contractually had. Whether he did in fact assign them was a merits determination. The Second Circuit though excluded entirely any claims by defendants under the contract; once it did so, obviously an infringement claim shorn of any contractual right doesn't arise under the contract and any forum selection clause in that contract doesn't apply. The court's exclusion, besides being sophistry, is also based on confusing jurisdictional analyses (where the presence of a defense cannot give rise to jurisdiction), with forum selection and arbitration clauses, where the conduct of both parties may be quite relevant. It is telling in this regard that the Phillips court rejected Omron's rejection of any principled difference between the two types of clauses.

Phillips is a disappointing opinion on many fronts. The court may well have been correct about the ultimate merits of Plaintiff's claim, but procedurally it is difficult to justify the result. Nor is my concern academic: as the court acknowledged, the result of its approach was not only to require separate proceedings in two different countries, but that so requiring "is a likely inconvenience to the parties and that they, in choosing to refer proceedings instead of claims, may have intended to bundle all claims constituting any proceeding in order to avoid fractured litigation." (p. 30). It is true that piecemeal litigation will occur anyway in arbitration disputes where one claim is held not be subject to the arbitration clause where others are, but the Phillips court's herniated analysis strikes me as leading it to protest too much.

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