A forum selection clause is often included in an agreement in order to specify where any later dispute regarding the agreement must be litigated.  In a recent decision, a federal magistrate judge in Ohio denied a defendant’s motion to transfer the venue of a lawsuit from Ohio to California based, in part, on the existence of a forum selection clause identifying Ohio as the venue for any dispute.  See Down-Lite International, Inc. v. Chad Altbaier, No. 1:19cv627, United States District Court, S.D. Ohio, Western Division (August 6, 2019).

According to the court’s decision, Down-Lite is a family owned corporation founded by Bob Altbaier and others, with its principal place of business located in Ohio. Defendant Chad Altbaier, one of Bob’s three children, was an employee at Down-Lite who worked principally from his home in California.  Chad allegedly was the founder and head of Down-Lite’s outdoor division. Down-Lite claimed that Chad signed an “Employee Agreement” that contained non-compete and non-solicitation provisions and a “Shareholder Agreement” that also contained restrictive covenants.  The Shareholder Agreement also contained a forum selection clause providing that claims be exclusively brought in a court located in Hamilton County, Ohio.

Down-Lite alleged that Chad formed his own company in California, resigned from Down-Lite and began competing with Down-Lite.  As a result, Down-Lite sued Chad in Ohio, claiming that he misappropriated trade secrets and violated his agreements by competing with Down-Lite.  In response, Chad filed his own lawsuit against Down-Lite in California, seeking damages and injunctive relief.

Chad also filed a motion in the Ohio court requesting a transfer of the Ohio lawsuit to California. He argued, among other things, that the Shareholder Agreement was unenforceable because it violated a California law prohibiting employers from requiring an employee “as a condition of employment, to agree to a provision that would require the employee to adjudicate outside of California a claim arising in California.”  On the record before it, the court rejected this argument, determining that the Shareholder Agreement was not required as a condition of Chad’s employment, particularly where several of Down-Lite’s non-employee shareholders, including Chad’s sisters, had also signed the agreement.  The court then noted that “a valid forum-selection clause almost always controls the outcome of a motion to transfer venue.”

The court also rejected Chad’s additional arguments in favor of a transfer of venue, including that it would be too expensive and disruptive to his business to force him to travel to Ohio.  The court noted that while travel from the West Coast to Ohio “is not ideal” for Chad, that inconvenience and expense did not “tip the scale” in favor of a venue transfer, particularly where Down-Lite’s principal place of business, its over 300 employees, its CEO and most of its officers and shareholders are all in Ohio.  The court then entered an order denying Chad’s motion to transfer the Ohio case to California, thus requiring the parties to continue to litigate the claims Down-Lite asserted against Chad in Ohio.

As the decision in the Down-Lite case illustrates, courts will typically enforce a valid forum selection clause, absent a compelling showing of prejudice to the party opposing a lawsuit in the agreed-to forum.

When negotiating and drafting stockholder and other agreements, family-owned businesses and their owners should consider including mandatory forum selection clauses.

These clauses are particularly useful when business operations and owners are spread across multiple states or even countries. Such clauses often set the venue for any litigation as the state, or even the county, where the business, its management or the majority of its owners are principally located.  And while substantive disputes under an agreement may still arise, a forum selection clause at least may provide a measure of certainty from the outset as to the location of any future legal action.  Without such a clause, a party to an agreement may be forced to litigate in a distant, inconvenient or otherwise unwanted location, which may ultimately increase the expense, disruption and risk in connection with any future lawsuit.