The Seventh Circuit Court of Appeals held that a sua sponte order of dismissal is improper because an objection to venue can be waived or forfeited.

In CPL, Inc. v. Fragchem Corp., No. 07-1784, 2008 WL 80637 (7th Cir. Jan. 9, 2008), CPL, a seller of chemicals used in the manufacturing of generic pharmaceutical products, and Fragchem, an importer and exporter of chemicals, entered into an exclusive Supply Agreement for a five-year term. The Supply Agreement contained an agreement to arbitrate disputes.

The Supply Agreement terminated after the five-year term. Regardless, Fragchem and CPL continued to do business. Fragchem placed an order with CPL, however, upon delivery Fragchem withheld payment from CPL.

In response, CPL filed a complaint against Fragchem for breach of contract. Fragchem countered by filing a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(7) on the ground that Cadila was a necessary party to the action.

The lower court dismissed CPL's lawsuit sua sponte for improper venue under Federal Rule of Civil Procedure 12(b)(3) based on the arbitration agreement in the Supply Agreement.

On appeal, CPL argued that an agreement to arbitrate does not survive if the written agreement between two parties expired, and there was not a subsequent written agreement governing the parties' relationship that contained an arbitration agreement.

The Court noted that because the lower court dismissed the case sua sponte, it did not address whether the parties were still bound by the Supply Agreement. A sua sponte order of dismissal is improper because an objection to venue can be waived or forfeited.

Further, the Court noted that the lower court offered no reason why it had either the right or the duty to reject such a waiver, given that neither party had moved to enforce the arbitration agreement and dismiss on grounds of improper venue.

The Court held that it was improper for the lower court to dismiss the lawsuit sua sponte on the grounds on improper venue based on an arbitration agreement between the parties that neither party explicitly or effectively indicated that it would not waive arbitration.

The Court noted that even if on remand one of the parties moves to compel arbitration, the lower court will still have determine whether the Supply Agreement applies to the transaction at issue.