Is the Closely Related Doctrine a Creature of State or Federal Law?

Image by Vilius Kukanauskas from Pixabay

The closely related doctrine, discussed here and here and here, posits that a non-signatory to a contract may be bound by a forum selection clause in that contract if the non-signatory is so “closely related” to a signatory that it was “foreseeable” that it would be bound. Robin Effron and I have argued that using the doctrine to assert personal jurisdiction over non-consenting non-signatories violates the Due Process Clause of the Fourteenth Amendment. There is, however, a threshold question that federal courts sitting in diversity must address before they reach this issue—whether the closely related doctrine is a creature of state law or federal law.

In C.E.B. Inc. v. HCL America. Inc, the U.S. District Court for the District of Massachusetts (Judge Brian E. Murphy) correctly held that the doctrine was a creature of state law. In this post, I first provide a brief summary of the decision. I then explain why this classification is correct.

Facts

Windsor Group Sourcing Advisory (“Windsor”), a company based in Nevada, entered into a sales agreement with HCL America, Inc. (“HCL America”), a company based in California. After that agreement was allegedly breached, Windsor sued HCL America and its parent company, HCL Technologies Limited (“HCL India”), a company based in India, in federal district court in Massachusetts.

HCL India moved to dismiss for lack of personal jurisdiction. Windsor argued that HCL India was subject to personal jurisdiction in Massachusetts by virtue of this forum selection clause in the sales agreement:

Both parties consent to the exclusive jurisdiction and venue in the state and federal courts presiding over Boston, Massachusetts for any and all disputes arising from this Agreement.

HCL India argued that the clause was not binding on it because it was not a party to the agreement. Windsor argued in response that HCL India was bound by the clause because it was closely related to the parties and the dispute. HCL India retorted that the issue was governed by state law and that the Massachusetts courts had never recognized the closely related doctrine. Windsor argued that the issue was, in fact, governed by federal law and that the federal courts had recognized the doctrine.

Analysis

The court began by acknowledging that “as a general principle, federal law governs enforcement of forum-selection clauses.” It then went on to observe, however, that the “scope and applicability of a clause is [sic] distinct from its enforceability” and that “whether a forum-selection clause applies to a non-signatory raises questions of applicability.” The court then followed the lead of the Third Circuit and the Sixth Circuit to hold that “questions of applicability . . . are governed by state law pursuant to the Erie doctrine.” Whether HCL India was bound by a forum selection clause in a contract it had not signed, in other words, had to be determined in accordance with the laws of Massachusetts. In support of this decision, the court noted that the Supreme Court had previously held that state law should be applied to determine whether an arbitration agreement bound a non-signatory. It would be odd, the court reasoned, if a different rule applied to forum selection clauses.

The court then set about determining the content of Massachusetts law. It found that the Massachusetts courts had never adopted the closely related doctrine, which meant that this doctrine did not control whether a non-signatory could be bound by a forum selection clause. The Massachusetts courts had, however, long recognized that a non-signatory may be estopped from denying the applicability of a forum selection clause. The court then reasoned that HCL India was estopped from denying the applicability of the Massachusetts forum selection clause because:

• Employees at HCL India had actively negotiated and approved the sales agreement.
• HCL India would potentially receive significant compensation (~$150 million) pursuant to the sales agreement.
• An employee of HCL India had emailed Windsor stating that HCL India was “excited” to partner with it and “bring these two deals home.”
• HCL India had sent a letter to Windsor stating that HCL India was terminating the agreement on the grounds that Windsor had not fully performed its obligations under the agreement.

Accordingly, the court denied HCL India’s motion to dismiss for lack of personal jurisdiction.

Conclusion

Judge Murphy got this one right. Federal law only governs the enforceability of forum selection clauses. State law governs all other issues, including how the clause should be interpreted, whether the clause is valid as a matter of contract law, and whether the clause binds non-signatories. Since the purpose of the closely related doctrine is to determine whether a clause binds a non-signatory, this is an issue governed by state (not federal) law.