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Eighth Circuit Disallows New Evidence from FLSA Plaintiffs, First Proffered in their Summary Judgment Opposition Papers, and Grants Summary Judgment

10 May 2013

In Carmody v. Kansas City Board of Police Commissioners, - F.3d -, 2013 U.S. App. LEXIS 8128 (8th Cir. Apr. 23, 2013), Plaintiff police officers had filed a complaint under the Fair Labor Standards Act, alleging that the Kansas City Police Department’s “flextime” pay system for its officers was improperly administered, resulting in under-payment of statutorily required overtime compensation by the Department.

The city had issued interrogatories to plaintiffs about the particulars of their claims, and, in response, plaintiffs confirmed the flextime practice that was the subject of their complaint, and described occurrences when it was used; but did not suggest the number of uncompensated hours or the amount of money owed. Plaintiffs stated that they would need access to department documents, such as daily activity sheets and other records, in order to formulate more accurate responses.

The city furnished nearly 13,000 activity sheets, after action reports and other documents to plaintiffs by January 27, 2012, and another 165 documents by February 16th. The city deposed the officers between February 21 and March 2, 2012, and discovery closed on March 2nd. Plaintiffs did not update their Rule 26 disclosures, or their discovery responses.

On March 30, 2012, the city moved for summary judgment, asserting among other things that the officers could not, as a matter of law, satisfy their evidentiary burden. The officers attempted to defeat summary judgment by attaching affidavits to their response. These affidavits contained precise estimations, week by week, of hours owed. The city moved to strike the affidavits, and the federal district court struck the officers’ affidavits and granted the city’s motion for summary judgment, deciding the officers unjustifiably failed to comply with their discovery obligations and that, without the affidavits, the officers failed to satisfy their burden of production by showing “the amount and extent of their alleged overtime work.”

The Eighth Circuit affirmed, emphasizing that the Federal Rule of Civil Procedure 26(a)(1)(A)(iii) requires parties to make initial disclosures, including a computation of damages, which under Rule 26(e)(1)(A) must be supplemented when new information comes to light. The district court has discretion under Rule 37(c)(1) to apply sanctions against a party who has failed to satisfy initial or supplemental disclosure requirements; for example, excluding the evidence or testimony entirely.

Thus, the Court concluded that the district court had not abused its discretion by barring plaintiffs’ affidavits on the grounds they had “unjustifiably failed to comply with Rule 26(e)(1)(A),” and that without any admissible evidence from plaintiffs showing “the amount and extent of their alleged overtime work,” summary judgment was properly granted.

The Carmody decision should serve as a reminder to employers of an important part of their summary judgment “toolkit.” If the plaintiffs have been vague about the exact nature of their claims and how they have been damaged, and they attempt for the first time to present new information in their papers opposing summary judgment, the defendant should be ready to pounce. Information that should have been but was not made part of plaintiffs’ Rule 26 disclosures, or supplements thereto, may be excludable in a motion to strike, and this may make the difference between defendant winning or losing its summary judgment motion.

Bring discovery motions within 30 days in Kansas Federal Court

03 May 2013

The United States District Court for the District of Kansas Local Rule 37.1 limits the time for bringing discovery motions to 30 days. It states:

Any motion to compel discovery in compliance with D. Kan. Rules 7.1 and 37.1 must be filed and served within 30 days of the default or service of the response, answer, or objection that is the subject of the motion, unless the court extends the time for filing such motion for good cause. Otherwise, the objection to the default, response, answer, or objection is waived.

D. Kan. Rule 37.1(b).

The trigger for the 30-day period is the date a party serves, or was required to serve, its discovery responses, and it is not tolled to account for the time parties spend engaged in efforts to resolve a discovery dispute. The parties themselves may not agree to extend the 30-day deadline; they must move the court for an extension for good cause or risk waiving any discovery objections[1].

The reported and unreported caselaw are replete with holdings striking untimely motions to compel to arguably inadequate discovery responses. In one recent case, the responding party, in response to a request for production, objected to the production of documents that both parties knew existed and were in defendant’s possession. Instead of moving to compel, pursuant to Local Rule 37.1, the propounding party moved for sanctions. That motion was denied. More than 30 days later, the propounding party moved to compel production of those same documents, and the court denied the motion as untimely.

In The United States District Court for the District of Kansas, a party has only 30 days to compel discovery responses or forever waive any objections.

[1] Layne Christensen Co. v. Purolite Co., 2011 WL 124538 at *3 (D. Kan. 2011)

The Importance of “Clawback Agreements”

26 Apr 2013

The Judges and Magistrates of U.S. District Court for the District of Kansas have recently begun instructing lawyers appearing before them in Rule 26(f) conferences that they consider it malpractice for parties not to have a clawback provision included in the submitted draft Scheduling Order. A clawback provision, as expressly permitted by Rule 502(d) of the Federal Rules of Evidence, allows parties to recover inadvertently disclosed privileged information, without being held to have waived attorney-client privilege or work product protection.

Some background: not too many years ago, if a party inadvertently turned over an attorney-client privileged or work product document in discovery, there was a significant likelihood that the party would be held to have waived its claim privilege, by the act of turning over the document. In today’s world, most documents are electronically stored, and depending on the type of case before a court, discovery can require the disclosure of thousands, or tens of thousands, or even millions of pages of documents to an adverse party. In 2008, in recognition of the problems associated with possible inadvertent disclosure, especially where the case involves large amounts of potentially relevant ESI, Rule 502 of the Federal Rules of Evidence was enacted, providing a framework for avoiding waiver, where privileged documents have inadvertently been produced.

Rule 502 takes a two-tiered approach. First, as a general rule, subject matter waiver will be limited to instances of either intentional disclosure (502(a)), or an inadvertent disclosure that the holder of the privilege did not take reasonable steps to prevent (502(b)). Thus, if the parties to a lawsuit have reached no agreement, and the Scheduling Order says nothing about the re-capture of inadvertently disclosed privileged documents, the parties might themselves in a legal donnybrook, if a disclosing party claims to have accidentally turned over privileged material, and the receiving party disputes whether “reasonable steps” were in fact taken to prevent inadvertent disclosure.

The second tier of Rule 502 – subsections (d) and (e) - allows for broader protection against waiver, and it is these provisions to which Judge Waxse referred in his comment about potential “malpractice”. Rule 502(d) permits “a federal court [to] order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court – in which event the disclosure is also not a waiver in any other federal or state proceeding.” There are two important aspects to Rule 502(d): it can eliminate any potential dispute over whether “reasonable steps” were taken to prevent inadvertent disclosure; and it is available only if incorporated in a court order (commonly, the Scheduling Order, but also quite possibly in a court-approved confidentiality agreement between the parties). Rule 502(e) states that an agreement between the parties not incorporated in a court order “will be binding only on the parties to the agreement” and will have no effect in a subsequent court action or on nonparties. So, it is clearly in the best interest of a party seeking a clawback agreement to have it adopted by the court, in an order, to ensure the protections of Rule 502(d).

A recent example of the significance of Rule 502(d) appeared in the case of Brookfield Asset Mgmt., Inc. v. AIG Fin. Prods. Corp., No. 09 Civ. 8285-PGG-FM, 2013 WL 142503 (S.D.N.Y. Jan. 7, 2013), where privileged information had been redacted from the face of a document, but could be viewed in the metadata, resulting in its inadvertent disclosure. “Dueling letters” ensued between counsel as to whether privilege had been waived. The court reminded the parties, however, that while this event underscored “the need for counsel for a producing party to keep a watchful eye over their e-discovery vendors”, privilege was not waived because a Rule 502(d) order had been entered in the case. The court pointed to the language of the order that “Defendants’ production of any documents in this proceeding shall not, for the purposes of this proceeding or any other proceeding in any other court, constitute a waiver by Defendants of any privilege applicable to those documents, including the attorney-client privilege…”, and concluded that Defendant had “the right to claw back the minutes, no matter what the circumstances giving rise to their production were.” (Emphasis added.)

The lesson here is clear: any party to a lawsuit – and especially a corporate defendant who may be called upon to disclose large amounts of electronic data in discovery – is well-advised to seek a clawback agreement, preferably adopting a “no fault” standard that takes avoids any possible debate over whether “reasonable steps” were taken - and have it approved and entered into an order of the court.

Jarrow Moderates Panel of Missouri Civil Court Judges

24 Apr 2013

On April 19, BSCR attorney James R. Jarrow moderated a panel of eight Missouri civil court judges at a seminar entitled “As Judges See It: Top Mistakes Attorneys Make in Civil Litigation.” The seminar covered topics related to, among others, local court procedure, summary judgment and motion hearings, pre-trial conferences, and trial. The panel of judges shared their expectations and preference with regard to these topics. The seminar was held at the Embassy Suites in Kansas City, Missouri.

BSCR Obtains Favorable Result for Retail Client at Trial

22 Apr 2013

After a week-long trial in which plaintiff alleged severe physical and mental injuries left her disabled after being hit by a shopping cart in our client’s retail store, a Kansas Federal jury returned a verdict finding our client to be 100% at fault. Throughout the litigation, the client admitted the shopping cart had struck plaintiff (as shown by surveillance video), but disputed plaintiff’s alleged damages. The jury awarded plaintiff $13,151 in medicals, $3,000 in pain and suffering, $0 for lost wages, $0 for future medicals, and $0 for loss of earning capacity, for a total judgment of $16,151. Plaintiff, before trial, demanded $265,000 and rejected defendant’s $25,000 offer to settle. At trial, plaintiff asked for $2,000,000.

Missouri Court of Appeals Applies "All Sums" Doctrine and Reinstates $62M verdict Against Lloyd's of London

19 Apr 2013

On April 16, the Missouri Court of Appeals for the Eastern District reinstated a jury verdict against Certain Underwriters at Lloyd’s of London for $62.5 million under various excess liability policies issued to Doe Run Resources Corporation (“Doe Run”), a lead mining and smelting company operating in St. Francois County, Missouri, related to environmental remediation efforts by the company. The decision is noteworthy as it represents a new statement of Missouri law on “all sums” versus “pro rata” allocation of multiple policy years’ coverage, and a reversal of this court’s prior position on the issue.

Prior to trial, the court granted summary judgment in favor of Lloyd’s on its argument that there was no coverage for three of the six mining sites, which were not in operation during the policy periods implicated by Doe Run’s claims. Notwithstanding this ruling, the jury was provided a verdict form to assess damages for all six mining sites, and did find in Doe Run’s favor on all six. The jury also returned a verdict for vexatious refusal to pay on each of the sites. The court reduced the jury’s verdict based upon its prior rulings, to $5 million. Both sides appealed. The Eastern District Court of Appeals reversed the trial court’s rulings in favor of Lloyd’s, and reinstated the $62.5 million jury verdict against the underwriters.

ALL SUMS VERSUS PRO RATA COVERAGE

The “all sums” dispute arises in the context of liabilities for which there is a long latency period, typically toxic tort or environmental clean-up cases, in which liability-provoking events occurred in multiple policy periods. It is not unusual for insurance policies, particularly historic ones, to provide coverage for “all sums which the insured shall become legally obligated to pay as damages” resulting from a covered occurrence within the policy period.

The policyholder’s argument for “all sums” coverage is that the policyholder should be able to choose any policy period in which there was a covered occurrence or covered wrongful act, and exhaust all coverage available under policies applying to that time frame, without regard to other policies that might provide coverage. The theory is that the entirety of the damages are part of the “all sums” covered by the selected policies, and that the insured’s “reasonable expectation” is that any given policy will provide coverage, up to its limits, for “all sums” resulting from the covered occurrence or acts. Under “all sums” treatment of claims, “when multiple policies are triggered to cover the same loss, each policy provides indemnity for the insured’s entire liability, and each insurer is jointly and severally liable for the entire claim.” Rubenstein v. Royal Ins. Co., 694 N.E.2d 381, 388 (Mass. App. Ct. 1998). While “all sums” is deemed to be the majority rule, fewer than a dozen states have specifically applied this doctrine.

“Pro rata” coverage is the alternate approach to coverage. Most courts that employ the “pro rata” approach allocate an insurer’s indemnity obligations on a pro rata basis by the insurer’s time on the risk. For example, if an insurer has a six-year period of coverage and the exposure period is thirty years, the insurer would be responsible for one-fifth of the damages, up to the limits of its policies. Alternately, some courts apply pro rata based upon each insurer’s respective percentage of the total available limits. See Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994).

With respect to our local jurisdictions, Kansas has rejected “all sums” and adopted a pro rata approach based on time on the risk. Atchison, Topeka & Santa Fe Ry. Co. v. Stonewall Ins. Co., 71 P.3d 1097 (Kan. 2003). Illinois accepts the “all sums” approach (Zurich Ins. Co. v. Raymark Indus. Inc., 514 N.E.2d 150 (Ill. 1987)), but there is a split amongst the intermediate appellate courts as to whether there should be pro rata allocation before reaching excess policies where there are time periods in which the claimant was uninsured or self-insured. Cf. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 283 Ill.App.3d 630, 642, 670 N.E.2d 740 (Ill. App. 2d Dist. 1996) (pro rata required) and Caterpillar, Inc. v. Century Indem. Co., 2011 WL 488935 (Ill. App. 3d Dist. Feb. 1, 2011) (all sums required).

CHOICE OF LAW

Lloyd’s sold excess insurance policies to Doe Run covering policy years 1952-61. During this time frame, Doe Run was headquartered in New York City and had mining operations in several states. Lloyd’s Reply Brief, 2013 WL 1614613, *1. Doe Run’s broker was located in New York. Id. The trial court found that New York law governed. Choice of law was critical to this case, because New York does not accept the “all sums” approach, instead applying pro rata allocation. See Mt. McKinley Ins. Co. v. Corning, Inc., No. 602454/02 (N.Y. Supreme Ct. Sept. 7, 2012).

The Court of Appeals reversed on this issue, finding that the six mining sites at issue were located in Missouri, and that this being the “location of the risk,” Missouri law should apply. This appears to be a strained interpretation of choice of law rules. At the time the policies were issued, in New York, they covered Doe Run’s world-wide risks, including mining operations located in New York, Pennsylvania, Texas, Montana, Louisiana, Missouri, and foreign countries including Canada, Algeria, Morocco, Argentina, and Peru. Lloyd’s Reply Brief, 2013 WL 1614613, *1, *25. Lloyd’s attempted to distinguish these policies from those discussed in Crown Center Redevelopment Corp. v. Occidental Fire & Cas. Co., 716 S.W.2d 348 (Mo. App. W.D. 1986), in which each insured risk site was specifically identified in the policy, because the Doe Run policies did not specifically identify any particular Missouri sites of operations, just Doe Run’s general corporate operations world-wide. Lloyd’s Reply Brief, 2013 WL 1614613, *25. We tend to agree with Lloyd’s that the Court’s finding that Missouri had the “most significant relationship” with the policies is strained.

DOE RUN REVERSES EASTERN DISTRICT COURT OF APPEALS’ PRIOR HOLDING ON PRO RATA ALLOCATION

The Doe Run case is notable because it marks the first Missouri case to apply “all sums with stacking,” a doctrine being pioneered in California, as well as being a reversal of this very court’s prior application of pro rata allocation. See Continental Cas. Co. v. Med. Protective Co., 859 S.W.2d 789, 792 (Mo. App. E.D. 1993) (“Where the loss is caused not by a single event but by a series of cumulative acts or omissions, we believe the fair method of apportioning the loss among consecutive insurers is by application of the ‘exposure theory’ utilized in cases of progressive disease such as asbestosis. . . . Recognizing that words such as ‘bodily injury’ and ‘occurrence’ as used in typical insurance policies covering an accident or common disease, become inherently ambiguous when applied to a cumulative, progressive disease, the court held that proration of the loss among consecutive insurers should be based upon the period each was exposed to potential liability”). The Doe Run opinion does not reference this decision or explain its departure from the court’s earlier approach.

As the Missouri Supreme Court has not yet ruled on “all sums” versus “pro rata” allocation, the only case law on “all sums” versus pro rata allocation is two conflicting opinions from the same intermediate court of appeals. There are additional interesting issues presented by Lloyd’s appeal, including the arguments regarding vexatious refusal to pay, particularly in light of the unsettled state of Missouri law on “all sums” versus pro rata and this very court’s prior ruling in support of pro rata allocation. We expect that Lloyd’s will pursue transfer to the Supreme Court, and will update with any news on that front.

Kansas Supreme Court Clarifies Standard for Determining if an Injury Arose "Out of and in the Course of Employment", for Purposes of Workers Compensation Benefit

17 Apr 2013

In Douglas v. Ad Astra Info. Sys., 293 P.3d 723 (Kan. 2013), Danny Douglas was awarded benefits under the Workers Compensation Act for an injury he sustained while operating a go-cart at an event sponsored by his employer, Ad Astra Information Systems, L.L.C. The Workers Compensation Board granted benefits to Douglas, and his employer and its insurer appealed, arguing that Douglas’s injury was sustained during a recreational or social event that he was not required to attend, and that he was therefore not entitled to benefits.

The Court of Appeals upheld the award of benefits, citing to factors set forth in a well-known treatise (Larson’s Workers’ Compensation Law), for determining whether the injury arose out of and in the course of employment. The Kansas Supreme Court reversed and directed the Board to review the facts and reconsider its decision based upon the factors that really count: those contained in the statute. The Supreme Court ruled that the language of the statute setting forth criteria for making this type of determination was plain and unambiguous, and that the court below erred in applying the factors set forth in Larson. “A legal treatise may be utilized to explain and interpret Kansas law, but it cannot serve to supplant or alter the actual text of a statute.”

The Court ruled that K.S.A. 2006 Supp. 44-508(f) sets forth the circumstances in which an employee injury sustained during a recreational or social event will be held not to “arise out of and in the course of employment”. An employee's injuries will be excluded from coverage under the Workers Compensation Act where either (1) the employee was under no duty to attend the recreational or social event, or (2) the injury resulted neither from the performance of tasks related to the employee's normal job duties nor from performing tasks that he was specifically instructed to perform by his employer.

Collective Liability and Product Identification in Kansas

10 Apr 2013

The volume of reported case law in Kansas tends to be lower than in many other jurisdictions, sometimes resulting in the apparent novelty of legal issues that have long been settled elsewhere. The necessity of product identification is one area where there is a scarcity of reported case law, but clear indications that Kansas law requires plaintiffs to identify the specific product that caused their alleged harm. No reported Kansas case has ever adopted a “collective liability” theory like enterprise liability, alternate liability, or market share liability. We have also obtained summary judgment in favor of a product manufacturer on both enterprise and alternative liability theories.

Causation is an essential element of a product liability claim and a prerequisite to recovery, whether the claim sounds in negligence or in strict liability. Wilcheck v. Doonan Truck & Equip., Inc., 220 Kan. 230, 235, 552 P.2d 938, 942 (Kan. 1976). For plaintiffs to recover on a product liability claim, the defective product must be both the actual and proximate cause of the injury. Wilcheck, 220 Kan at 235, 552 P.2d at 942. Actual cause, or “cause-in-fact,” must be established. Stueve v. American Honda Motors Co., Inc., 457 F. Supp. 740, 759 (D. Kan. 1978) (applying Kansas law). “The mere fact that a person suffered injury while using a product is insufficient in itself to satisfy the requirement of proof that a defect in the product was a proximate cause of the injury.” Wilcheck, 220 Kan. at 235-36, 552 P.2d at 943.

Where a plaintiff fails to adduce sufficient evidence of causation, by linking a defect in the product to the plaintiff’s alleged injuries, plaintiff is not entitled to proceed to a jury on his claims and entry of summary judgment is proper. Wilcheck, 220 Kan. at 238-39, 552 P.2d at 945. The overwhelming majority of jurisdictions agree that, to prove actual and proximate causation of his injuries, a plaintiff must, at a minimum, identify the manufacturer of the allegedly defective product that is claimed to have caused his injuries. See, e.g., Mitchell v. Gencorp Inc., 165 F.3d 778, 781 (D. Kan. 1999) (applying Kansas law).

The lead Kansas case on product identification is Mays v. Ciba-Geigy Corp., 233 Kan. 38, 54, 661 P.2d 348, 360 (Kan. 1983). Mays involved product liability claims brought by a worker injured in an explosion of a gas pipeline. Id., 233 Kan. at 39-40, 661 P.2d at 350-51. Among the components of the gas pipeline system were fiberglass pipe and related products manufactured by defendant Ciba-Geigy, as well as numerous components engineered, manufactured and sold by entities other than Ciba-Geigy. See id. The Supreme Court affirmed the trial court’s grant of summary judgment to Ciba-Geigy on the grounds that the plaintiff in Mays failed to establish the essential elements of his case. The Supreme Court cited with approval the finding of the trial court that:

“plaintiff is unable to negate products by manufacturers other than Ciba-Geigy as being products where a failure occurred. Although there is a possibility that a Ciba-Geigy product failed, there is an equal possibility that a non-Ciba-Geigy product failed.”

233 Kan. at 54, 661 P.2d at 361.

Not specifically addressed by Mays is the circumstance in which plaintiffs seek to proceed on collective liability theories, naming numerous manufacturer defendants who marketed products of the type that caused injury to plaintiff. No reported Kansas case has adopted any of these theories, however, which have gotten stale with the passage of time.

Other jurisdictions that have considered cases where a plaintiff cannot identify the particular product that caused him injury have overwhelmingly held that such plaintiff’s product liability claims should be dismissed as a matter of law, because proof of the identity of the product that allegedly caused injury is a “fundamental principle” of product liability law and is necessary for plaintiff to prove cause-in-fact and proximate cause. See, e.g., Smith v. Eli Lilly & Co., 560 N.E.2d 324, 328 (Ill. 1990); Mathers v. Midland-Ross Corp., 532 N.E.2d 46, 49 (Mass. 1989); Case v. Fibreboard Corp., 743 P.2d 1062, 1064 (Okl. 1987); Abel v. Eli Lilly & Co., 343 N.W.2d 164, 170 (Mich. 1984); Namm v. Charles E. Frosst and Co., Inc., 427 A.2d 1121, 1125 (N.J. Super. App. Div. 1981); Roehling v. National Gypsum Co. Gold Bond Building Prods., 786 F.2d 1225, 1226 (4th Cir. 1986); Blackston v. Shook and Fletcher Insulation Co., 764 F.2d 1480, 1482 (11th Cir. 1985) (applying Georgia law); Bryant v. Tri-County Elec. Membership Corp., 844 F. Supp. 347, 354 (W.D. Ky. 1994); Pipon v. Burroughs-Wellcome Co., 532 F. Supp. 637, 638 (D.N.J. 1982); Gray v. United States, 445 F. Supp. 337, 338 (S.D. Tex. 1978).

Arguing a combination of Mays and the abundant reported case law on product identification in other jurisdictions seems to be a winning formula. The Kansas courts have not adopted theories of enterprise, alternative, or market share liability, and at this time there is no indication that the courts would be inclined to accept such theories.

FLSA Arbitration Clause that includes Class Action Waiver Held Enforceable by Eighth Circuit

03 Apr 2013

In Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013), the Eighth Circuit recently held that an arbitration agreement which included a class action waiver provision was enforceable under the Fair Labor Standards Act. A Mandatory Arbitration Agreement (“MAA”) between plaintiff Owen and Bristol Care provided that the parties agreed

"to the resolution by binding arbitration of all claims or controversies for which a federal or state court or other dispute resolving body otherwise would be authorized to grant relief whether arising out of, relating to or associated with ... any ... legal theory that Employee may have against the Company or that the Company may have against the Employee."

The MAA further provided that it applied to "claims for wages or other compensation," as well as "claims for violation of any federal ... statute ... including but not limited to ...the Fair Labor Standards Act .... " The agreement also contained a waiver prohibiting the parties "from arbitrating claims subject to [the] Agreement as, or on behalf of, a class" (the "class waiver"). The MAA, however, expressly did not waive “… the right to file a complaint with the U.S. Equal Employment Opportunity Commission ... or any other federal, state or local agency designated to investigate complaints of harassment, discrimination, other statutory violations, or similar claims." 702 F.3d at 1051.

In reaching its decision, the Eighth Circuit rejected the National Labor Relations Board’s holding in D.R. Horton, 357 N.L.R.B. No. 184, 192 LRRM 1137 (Jan. 3, 2012), which had held that a class waiver of this type was unenforceable in an FLSA case because it conflicted with employee rights protected by Section 7 of the NLRA. The Eighth Circuit concluded that the Board’s D.R. Horton ruling was directly contrary to a long line of U.S. Supreme Court cases favoring the enforcement of arbitration agreements, and the provisions of the Federal Arbitration Act. 702 F.3d at 1054-55.

Forum Selection Clauses and Personal Jurisdiction

27 Mar 2013

In Hope’s Window, Inc. v. McClain, - S.W.3d - , case no. WD75137 (Mo.App. W.D. March 19, 2013), a New York based window company entered into a contract with a Missouri customer for the sale and purchase of windows, doors, doorframes, and hardware for the customer’s Missouri residence. After the customer had made a down payment of $66,915 to Hope’s Windows, a dispute arose, and the customer refused to make further payments under the contract. The contract, executed by the customer in Missouri, contained a choice-of-law and forum-selection clause that provided, in pertinent part: “Any dispute arising under this agreement shall be under the jurisdiction and governed by the laws of the State of New York. The venue for any litigation under this agreement, if commenced by SELLER or BUYER, shall be in a court of competent jurisdiction in Chautauqua County in the State of New York.”

The customer failed to appear in a New York action filed against him by Hope’s Windows, and when Hope’s Windows sought to register a New York default judgment for $85,244 in Missouri state court, the customer moved to vacate the petition to register the judgment, on the grounds that the New York court lacked personal jurisdiction over him. The trial court refused to register the judgment, after having “extensively evaluated” the customer’s contacts with New York, to determine whether the New York court had personal jurisdiction over him under New York’s long-arm statute and whether the New York court complied with Due Process in rendering its judgment.

The Court of Appeals reversed, observing that “[w]hile this analysis would have been proper in the face of a simple choice-of-law clause, it was wholly unnecessary in light of the forum-selection clause contained in the contract”, which required not only that any dispute be governed by New York law, but that any lawsuit be filed in Chautauqua County, New York.

Under the U.S. Supreme Court decision in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), a forum-selection clause should be enforced specifically, unless the challenging party can clearly show that enforcement would be unreasonable and unjust, or that the clause is invalid for such reasons as fraud or overreaching, or that enforcement would contravene a strong public policy of the forum in which lawsuit was brought. A forum-selection clause is prima facie valid, and here, the circuit court erred by engaging in a “minimum contacts” analysis, before determining whether the forum selection clause was in fact enforceable.

Here, rather than arguing that the forum-selection clause was somehow invalid or unenforceable as contrary to public policy, the customer’s principal argument was that despite his signature and partial performance under the contract, he was not a party to the contract. Because he failed to meet his burden of showing that the forum selection clause was unenforceable, the Court of Appeals held that he had waived his right to challenge the New York court’s assertion of personal jurisdiction over him by agreeing to that clause, and remanded the case to the trial court, to address his other challenges to the petition to register the foreign judgment.

The Hope’s Window case should serve as a clear reminder to parties who enter into contracts that if you agree to a “forum selection” clause, you should expect to have to live with it. Absent unusual circumstances, you will be held to have consented to personal jurisdiction in the designated forum, and if you allow a default judgment to be taken against you in that forum, the judgment will likely be found enforceable against you in your home state.