A Forum Selection Clause Must Be "Mandatory" To Be Enforceable

Everybody loves a penguin, or at least I think that is so.  But Penguin Toilets, the Defendant in Roth v. Penguin Toilets, LLC, 2011 NCBC 45, can't be loving the result it got on its Motion to Dismiss, which was denied in the Business Court by Judge Murphy on Wednesday.

The Motion to Dismiss was based on Penguin's argument that litigation against it had to be brought in Michigan and that North Carolina was therefore an improper venue.  This was premised on a forum selection clause in the LLC's operating agreement which said that:

Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.

I don't know why even a penguin would choose to litigate in Wayne County, which boasts of being the home of the City of Detroit, over the North Carolina Business Court, but Wayne County is where Penguin has its headquarters, so that provides some explanation.

Roth was the former President of Penguin.  He had sued Penguin after his termination, claiming violations of the terms of his Employment Agreement.  He was also a member of the LLC.  Penguin said that venue was improper in North Carolina because of the forum selection clause in the Operating Agreement, although there was no forum selection language in the Employment Agreement.  Judge Murphy held that the terms of the Operating Agreement had not been incorporated by reference into the Employment Agreement and that the lawsuit was about the obligations owed to Roth under his Employment Agreement, not his rights as an LLC member.

Judge Murphy ruled that the clause would not be enforceable even if had been properly incorporated into the Employment Agreement.  North Carolina will only dismiss a case based on a forum selection clause if the clause is mandatory as to where the case must be filed.  That has been the ruling of the NC Court of Appeals before, in Mark Group Int'l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002).  Although the Penguin clause specified that "any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan," that language wasn't "mandatory" enough. 

You might think that the word "shall" is equivalent to "must," and therefore mandatory, but the word "shall" is falling into disfavor as a command.  The Committee drafting the Restyled Rules of Federal Evidence, which became effective yesterday, dropped the use of that word in a number of the Restyled Rules. The Committee on Rules of Practice and Procedure said:

'shall' is no longer generally used in spoken or clearly written English. The restyled rules replace "shall" with 'must,' 'may,' or 'should,' depending on which one the context and established interpretation make correct in each rule.

See here. at 29.  Words like "exclusive," "sole," or "only" are the magic words that will carry the ball across the line for an enforceable forum selection clause, as the NC Court of Appeals noted in the Mark Group case.

So what's this Penguin to do?  Leave some of that Michigan winter gear at home and resign itself to litigating in North Carolina.  Keep selling the Penguin toilets with overflow protection it offers from its headquarters in Michigan.  And work on revising that forum selection clause so it will stick the next time.  There's pretty clear guidance now about the words that it takes. 

Oh, and don't forget about N.C. Gen. Stat. §22B-3,  which makes a forum selection clause unenforceable if it requires litigation outside of North Carolina and it's "in a contract entered into in North Carolina."  That type of forum selection clause is against North Carolina's public policy, per the statute.  Roth presumably didn't enter into the Employment Agreement in North Carolina so that statute wasn't an issue in the case.

 

 

 

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