When Forum Selection Clauses Bind Non-Signatories

When a company signs a contract containing a forum selection clause, it is clearly bound by that provision.  But what about its parent company?  Its subsidiaries?  Its affiliates?  Are these non-parties likewise bound by the forum selection clause?

The answer to this question, as it turns out, is surprisingly complex.  On the one hand, it is a well-established principle of contract law that a party may not be bound by an agreement without its consent.  On the other hand, the courts have over the years recognized a number of doctrines – including the law of third-party beneficiaries, equitable estoppel, agency, alter ago, and successor liability – that may bind a company to an agreement that it never signed.

To further complicate matters, the courts have developed a novel doctrine – the closely-related-and-foreseeable test – that they apply to determine the rights and benefits of third parties exclusively in the context of forum selection clauses.  That test posits that a non-signatory may be bound by a forum selection clause if it is so “closely related” to a contract signatory that it was “foreseeable” that the non-signatory would be bound by the clause.  The courts created this doctrine in an attempt to promote litigation efficiency.  By bringing companies that are closely related to the contract signatory within the ambit of the forum selection clause, judges seek to avoid fragmented litigation, thereby ensuring that suits involving the same law and facts are litigated in a single forum.

In a new paper, we chronicle the rise of the closely-related-and-foreseeable test and discuss its strengths and weaknesses amid a broader analysis of determining when non-signatories should be bound by a forum selection clause.  We acknowledge that this new test promotes litigation efficiency.  We have concerns, however, about the tradeoffs between efficiency and other values such as personal autonomy and due process.  In particular, we argue that the utility of the closely-related-and-foreseeable test depends on who, precisely, is invoking the test and for what purpose.  We discuss four common scenarios below.

1. A Non-Signatory Defendant Invokes the Clause Against a Signatory Plaintiff. In this scenario, a plaintiff is suing Company A and Company B in federal district court in Ohio. Company A is a party to a contract with the plaintiff that contains a forum selection clause requiring litigation to proceed in New York.  Company B is not a party to this contract.  Company B moves to transfer the suit against it to New York on the basis of the forum selection clause.  The plaintiff argues that Company B is not a party to the contract containing the forum selection clause and that its motion to transfer should therefore be denied.  The court concludes that Company B is so closely related to Company A that it was foreseeable that it should be able to take advantage of the clause.  This outcome presents no problem under our framework.  Transferring the entire case to New York promotes litigation efficiency.  Company B’s personal autonomy is respected because it is seeking to benefit from the clause; it is not being forced to comply with the contract against its wishes.  And no due process issues are implicated.

2. A Non-Signatory Plaintiff Invokes the Clause Against a Signatory Defendant. In this scenario, two plaintiffs are suing company A in federal district court in New York. The first plaintiff is a party to a contract with Company A that contains a forum selection clause requiring litigation to proceed in New York.  The second plaintiff is not.  Company A argues that the court lacks personal jurisdiction over it with respect to the claims brought by the second plaintiff because Company A lacks minimum contacts with New York.  The second plaintiff responds that it is so closely related to the first plaintiff that it was foreseeable to Company A that it would be bound by the clause consenting to jurisdiction in New York.  The court agrees with the second plaintiff and asserts personal jurisdiction over Company A.  Again, this outcome presents no serious problems under our framework.  The essential question is whether the second plaintiff may take advantage of Company A’s prior decision to consent to jurisdiction in New York in its contract with the first plaintiff.  We cannot perceive any reason why the courts should not be permitted to rely on the closely-related-and-foreseeable test to answer this question.

3. A Signatory Defendant Invokes the Clause Against a Non-Signatory Plaintiff. In this scenario, two plaintiffs are suing company A in federal district court in Ohio. The first plaintiff is a party to a contract with Company A that contains a forum selection clause requiring litigation to proceed in New York.  The second plaintiff is not.  Company A moves to transfer the entire case to New York on the basis of the forum selection clause.  The second plaintiff objects on the grounds that it is not a party to the contract containing the clause.  The court concludes that the second plaintiff is so closely related to the first plaintiff that it is foreseeable that it would be bound by the clause and orders the case transferred.  This outcome is troubling under our framework because it infringes upon the personal autonomy of the second plaintiff.  The second plaintiff never signed the contract containing the forum selection clause, and yet the court invokes that clause to hold that the plaintiff may not bring suit in its chosen forum.  This scenario presents a number of concerns on the personal autonomy front and is therefore suspect under our framework.  This scenario does not, however, present any due process issues.

4. A Signatory Plaintiff Invokes the Clause Against a Non-Signatory Defendant. In this scenario, the plaintiff is suing Company A and Company B in federal district court in New York. Company A is a party to a contract with the plaintiff that contains a forum selection clause requiring litigation to proceed in New York.  Company B is not a party to this contract.  Company B argues that the court lacks personal jurisdiction over it because it lacks minimum contacts with New York. The plaintiff responds that the court has personal jurisdiction over Company B because it is so closely related to Company A that it is foreseeable that it would be bound by the clause.  We view this outcome as especially troubling for two reasons.  First, the clause is being enforced against Company B notwithstanding its status as a non-signatory.  It is being forced to abide by a contract it never signed.  Second, the court’s assertion of personal jurisdiction under these facts raises serious due process concerns.  If Company B lacks minimum contacts with New York, and if Company B never otherwise consented to jurisdiction in New York, it is far from clear that the court may constitutionally assert personal jurisdiction over Company B regardless of its close relationship with Company A.

We have no quarrel with using the closely-related-and-foreseeable test to bind non-signatories to forum selection clauses under certain circumstances.  Using the test to bind non-signatory companies without their consent, however, presents a number of concerns.  When the test is used to assert personal jurisdiction over non-signatory defendants, these concerns are felt even more keenly.

This post comes to us from professors John F. Coyle at the University of North Carolina School of Law and Robin Effron at Brooklyn Law School. It is based on their recent paper, “Forum Selection Clauses, Non-Signatories, and Personal Jurisdiction,” available here.

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