Manufacturing Alert: New Court Decision Underscores Importance of Forum Selection Clauses in Contracts
When a domestic company starts a relationship with an international partner, choosing the jurisdiction in which any dispute must be litigated in the event of a contract breach may not be top of mind. But a recent decision by the Connecticut Supreme Court illustrates the vital importance of including a forum selection clause in any contract with a foreign company in order to avoid the risk of having to litigate overseas.
In North Sails Group, LLC v. Boards and More GMBH et al., a Connecticut-based company, North Sails Group, LLC (North Sails), had entered into trademark agreements with an Austrian manufacturer, Boards and More GmbH (B&M), in 1990 and again in 2000. Under the agreement, North Sails gave B&M a worldwide license to use certain North Sails trademarks and its tradename on a line of windsurfing, kitesurfing, and similar products that B&M manufactured and distributed. The contract did not include a forum selection clause specifying where any litigation must take place.
Almost 30 years into this relationship, B&M allegedly replaced the North Sails trademark on its products with its own trademark, in breach of the parties’ contract. When North Sails brought an action against B&M in Connecticut state court, the Austrian company moved to dismiss, arguing it had not had sufficient minimum contacts with Connecticut to justify the state’s courts exercising jurisdiction over the Austrian company under the Due Process Clause. The trial court agreed and dismissed the action.
The case went all the way up to the Connecticut Supreme Court. Given the significance of the case to Connecticut businesses, the Connecticut Business & Industry Association (CBIA) filed a brief in support of North Sails. We (Jeff White and Denis O’Malley of Robinson & Cole LLP) represented the CBIA.
SUPREME COURT DECISION
In a 5-2 decision issued last month, the Connecticut Supreme Court affirmed: the state’s courts did not have jurisdiction over B&M, despite its decades-long contractual relationship with the Connecticut-based company.
The crux of the majority opinion is that B&M did not really do anything in Connecticut. The only contacts B&M had with the state were its contract with North Sails (which, in and of itself, is not enough to establish jurisdiction) and a single in-person visit to Connecticut by a B&M executive over the course of the decades-long contractual relationship. Though the two companies communicated extensively over that time—communications that were directed to North Sails’ Milford, Connecticut, headquarters—the majority treated those communications as only “ancillary” contacts with the State that did not amount to sufficient minimum contacts with Connecticut. So, if Connecticut-based North Sails wants to enforce the trademark agreement it entered into with B&M, it cannot do so in Connecticut—and may well have to file suit in Austria.
This decision leaves Connecticut-based businesses working with overseas partners in a precarious position. If those companies’ contracts did not include language selecting Connecticut (or another domestic court) as the forum for litigation, enforcing the agreement in the event of a breach by the foreign partner could well mean filing suit overseas—likely at significantly higher cost and inconvenience than domestic litigation.
The CBIA, represented by Robinson+Cole, filed an amicus brief in the case expressing its concern with that potential outcome. In a lengthy dissent, Justice Steven D. Ecker, joined by Justice Maria A. Kahn, echoed that concern, writing:
“I also am concerned that the result reached by the majority will compromise our state’s legitimate efforts to provide a forum for Connecticut residents to seek redress when they have been wronged by foreign corporations.”
The U.S. Supreme Court’s controlling decision in “Burger King emphasized the need to conduct the due process analysis in a way that recognizes and respects the realities of the commercial world. I see no reason why we should disregard those commercial realities, as articulated in an amicus curiae brief filed in the present case by the Connecticut Business and Industry Association, and adopt a default rule that requires Connecticut residents to bargain for the right to litigate claims in their home courts [by including a forum-selection clause in their contracts] when jurisdiction is otherwise proper.”
The takeaway from this decision for Connecticut-based companies is straightforward: When entering into contracts with overseas partners, be sure to include a forum-selection clause choosing a domestic court for any litigation in the event of a breach. Or, at a minimum, perhaps consider an overseas arbitration forum. While it is true that companies often do not have a lot of leverage, it is always easier to ask for a forum to be included before a dispute arises. To be sure, the jurisdictional analysis applied in North Sails will always depend on the facts of a particular case. Different circumstances could well expose the foreign company to domestic jurisdiction without need for a forum-selection clause. However, as the North Sails decision makes clear, it is always better to be safe than sorry—particularly if the expense, inconvenience, and uncertainty of overseas litigation can be avoided by adding a relatively simple forum-selection clause to your contract.