779 F.2d 643 (11th Cir. 1986), 85-7231, Stewart Organization, Inc. v. Ricoh Corp.

Docket Nº:85-7231.
Citation:779 F.2d 643
Party Name:The STEWART ORGANIZATION, INC., a corporation; Walter H. Stewart, and James S. Snow, Jr., Plaintiffs-Appellees, v. RICOH CORPORATION, a corporation, Ricoh of America, Inc., a corporation, Defendants-Appellants.
Case Date:January 10, 1986
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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779 F.2d 643 (11th Cir. 1986)

The STEWART ORGANIZATION, INC., a corporation; Walter H.

Stewart, and James S. Snow, Jr., Plaintiffs-Appellees,


RICOH CORPORATION, a corporation, Ricoh of America, Inc., a

corporation, Defendants-Appellants.

No. 85-7231.

United States Court of Appeals, Eleventh Circuit

January 10, 1986

Rehearing En Banc Granted March 14, 1986.[*]

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Ralph H. Yeilding, Bradley, Arant, Rose & White, Scott M. Phelps, Birmingham, Ala., for defendants-appellants.

Joseph W. Letzer, Thomas, Taliaferro, Forman, Burr & Murray, Janet L. Humphreys, Birmingham, Ala., for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of Alabama.

Before GODBOLD, Chief Judge, JOHNSON, Circuit Judge, and TUTTLE, Senior Circuit Judge.

JOHNSON, Circuit Judge:

This case represents another episode in a dialectic that has engaged the federal courts for fourteen decades--the precise scope of the laws governing federal court decisions in diversity actions. Specifically, this case requires us to decide whether a freely negotiated contractual choice of forum clause is enforceable in diversity actions in federal court when the forum state considers such clauses to be violative of public policy. For the reasons explained herein, we find that such clauses present procedural questions to be resolved by federal law independent of forum state policy. Accordingly, we REVERSE the judgment below and REMAND WITH INSTRUCTIONS to transfer this case to an appropriate forum.


Appellant Ricoh Corporation is a nation-wide manufacturer of copy machines with headquarters in New Jersey and with significant corporate operations conducted in Manhattan. 1 The appellee, The Stewart Organization, is a closely held corporation in Birmingham, Alabama, that engages in a variety of entrepreneurial endeavors. The chief figures in appellee's operations are controlling shareholders Walter H. Stewart and James S. Snow, Jr. Stewart is evidently a man afflicted with the Midas touch. He is a certified public accountant of fifteen years standing, is senior partner in a major Birmingham firm, and has been in and out of several ventures, each turning multi-million dollar profits. He purchased a failing local copying business and took it from $750,000 indebtedness to sales of $1.8 million in one year.

Due to dissatisfaction with the Savin machines the Organization sold, Stewart entered into negotiations with appellant to become a dealer for Ricoh in central Alabama. After lengthy negotiations, Mr. Bob Banks of Ricoh presented Mr. Stewart with a printed "Dealer Sales Agreement" contract. While certain blank spaces in the contract were filled in by Banks with Stewart's acquiescence, Stewart did not bother to read Paragraph 18.1 of the contract (nor, apparently, any of the other printed language)

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which contained a choice of law clause and a choice of forum clause in favor of New York law and a Manhattan forum respectively. 2 Banks stated that the contract was standard and no changes of substance would be permitted, and he pushed Stewart to sign it so that Banks could catch his plane back to Atlanta. Stewart never did read the clause until his counsel pointed it out to him prior to this suit.

On September 28, 1984, appellee filed this action in the United States District Court for the Northern District of Alabama alleging breach of contract, breach of warranty, fraud, and federal antitrust violations arising out of the dealer-manufacturer relationship between Ricoh and the Stewart Organization. The action was based on diversity and federal question.

In response to this complaint, the appellant filed motions to dismiss and to transfer on grounds of improper venue and inconvenient forum, pointing to the choice of law and forum selection clauses of Paragraph 18.1 of the contract. Following briefing and oral argument, the trial court denied the appellant's motions on January 29, 1985. The court refused to enforce the clauses because it was of the opinion that state law governed the enforceability of a forum selection clause (which Alabama law deems contrary to public policy) and because the forum clause did not embrace all of the appellee's claims, meaning transfer would split the case. This interlocutory appeal comes by certification of the district court under 28 U.S.C.A. Sec. 1292(b). 3 We granted the petition for permission to appeal.


This appeal raises three issues: A) whether federal or state law governs the enforceability of a forum selection clause; B) whether this particular forum selection clause is unenforceable as unreasonable or overreaching; and C) whether this particular clause has sufficient scope to transfer all claims to a New York court. 4 These issues are purely legal and accordingly are subject to plenary review by this Court. Cathbake Inv. Co. v. Fisk Elect. Co., 700 F.2d 654, 656 (11th Cir.1983).

A. Federal or State law?

Since Swift v. Tyson, 41 U.S. (16 Pet.) 1, 10 L.Ed. 865 (1842), federal courts have been ensnared by an intellectual tar baby. They have wrestled, never wholly successfully, with the sticky question of which law, state or federal, will govern various aspects of the decisions of federal courts sitting in diversity. 5 Erie R. Co. v. Tompkins, 304 U.S. 64, 73, 58 S.Ct. 817, 819, 82 L.Ed. 1188 (1938), Justice Brandeis writing for the Court, overruled Swift and held

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that federal courts in diversity actions "would apply as their rules of decision the law of the State, unwritten as well as written." The decision sought to reflect properly the distribution of judicial power between two sovereigns; it was a recognition that one concomitant of our federalism is the need for special care at the intersection of state and federal sovereignty.

Though Erie spoke in language plain and firm, directing that henceforth in diversity a federal court would act merely as another court of that state, Justice Reed's concurrence suggested that the scope of Erie was delimited. While decisions in diversity were to be governed by substantive state law, yet "no one doubts federal power over procedure." Id. at 92, 58 S.Ct. at 828. The Supreme Court and inferior courts have grappled with this dichotomy ever since.

The distinction between substance and procedure, sad to say, proved little more than gossamer, for "[e]ach [term] implies different variables depending upon the particular problem for which it is used." Guaranty Trust Co. v. York, 326 U.S. 99, 108, 65 S.Ct. 1464, 1469, 89 L.Ed. 2079 (1945). Since this mechanical distinction proved unwieldy and unpredictable, Justice Frankfurter crafted a new approach in his opinion for the Court in Guaranty Trust. The premise of Erie, he reasoned, was that parties litigant should not be able to undermine policy choices of the forum state merely by crossing the street from the state to the federal courthouse. Federal courts sitting in diversity should resolve questions so that "the outcome of the litigation in federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court." Id. Thus, the "outcome determinative" test was launched.

Nine years' experience with this rule showed it to be harsh and unworkable. It gave too little deference to the validity of federal interests and constricted the function of the federal court system as an independent source of relief. In response, the Court held in Byrd v. Blue Ridge Rural Electric Coop., Inc., 356 U.S. 525, 537-39, 78 S.Ct. 893, 900-01, 2 L.Ed.2d 953 (1958), that determining which rules were to govern required balancing the federal interest in uniform process against the state interest in uniform results. The former Fifth Circuit found the former more important, Monarch Ins. Co. of Ohio v. Spach, 281 F.2d 401, 408 (5th Cir.1960), but other courts came to a contrary conclusion. Allstate Ins. Co. v. Charneski, 286 F.2d 238, 244 (7th Cir.1960).

Still unsatisfied, the Supreme Court turned to this vexing question yet again in Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965). To the extent that Congress has enacted federal procedural rules (and implicitly federal statutes governing federal court procedure), the question is governed by federal law. "[T]he constitutional provision for a federal court system ... carries with it congressional power to make rules governing the practice and pleading in those courts, which in turn includes a power to regulate matters which, though falling within the uncertain area between substance and procedure, are rationally capable of classification as either." Id. at 472, 85 S.Ct. at 1144. 6 State policy to the contrary, even if arguably substantive, is simply overridden.

With Hanna as our guide, we may descend from these rarefied heights to the facts of this case. The issue here is the enforceability of choice of forum and choice of law clauses freely adopted in arm's-length contractual negotiations. New York permits both; Alabama permits only contractual choice of law clauses. Redwing Carriers, Inc. v. Foster, 382 So.2d 554, 556 (Ala.1980); Goodwin v. George

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Fischer Foundry Systems, Inc., 769 F.2d 708, 712 (11th Cir.1985). Since it is clear by the terms of the contract that New York law will govern the underlying dispute, there is no question that, to the extent Guaranty Trust retains viability, the resolution of the choice of forum question will not affect the substantive outcome of the case. Both New York and Alabama would apply New York law.

We thus must simply decide whether these two parties may choose the courts of Manhattan as the appropriate venue. 7 The appellant suggests that the question is...

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