The Controversy over Non-Signatories to Forum Selection Clauses Goes Meta

Since the mid-1970s, forum selection clauses have become an increasingly pervasive feature of the contracting and litigation landscape. While scholars still debate whether and when certain parties to boilerplate contracts (such as consumers, employees, or other parties with limited bargaining power) should be bound to such clauses, a separate controversy has emerged over the extent to which these clauses can bind non-signatories. Enforcing a forum selection clause against a non-signatory goes beyond a simple assignment of venue. The effect is often to assert personal jurisdiction over a party who otherwise does not have minimum contacts with the forum state and has not signed an agreement to litigate there.

This blog has covered the issue of non-signatories to forum selection clauses here as part of a larger series of posts about contemporary issues with forum selection clauses. The issue is surprisingly undertheorized, especially given the outsized attention that scholars and commentators have paid to both forum selection clauses and thorny constitutional issues of personal jurisdiction in the past few decades. Aside from an article that John Coyle and I penned last year, academic commentary has been absent. And while many courts have rendered opinions addressing this issue, only a few of them have engaged in a deep or sustained analysis of how to unpack this thorny problem.

The “Closely Related and Foreseeable Test”

Parties use (or impose) forum selection clauses in contracts to select a favorable and predictable forum, and as a tool of litigation efficiency. However, sometimes the plaintiff joins defendants who are not parties to the contract with the forum selection clause. In some instances, these parties are not otherwise subject to the personal jurisdiction of the court. Faced with this hurdle, courts have developed a few strategies for addressing whether non-parties can be bound to the forum selection clause. Sometimes parties may be bound using traditional contract doctrines such as agency principles, equitable estoppel, or status as a third-party beneficiary. In other instances, a court might find that the non-signatory is subject to the jurisdiction of the court based on its own minimum contacts with the forum. But all too often, the non-signatory is not bound to the clause by contract or equitable principles, nor would a conventional minimum-contacts analysis reach the defendant.

In an attempt to bring the non-signatory within the ambit of the forum selection clause, thereby ensuring that the dispute is resolved in a single forum, the courts have developed and relied on the so-called “closely related and foreseeable test.” Under this test a party can enforce a contract’s forum selection clause against a non-signatory if the non-signatory is so closely related to one of the signatories “that enforcement of the clause is foreseeable by virtue of the relationship between them.” The result is that courts can use this doctrine to exercise jurisdiction over parties who would otherwise not be bound under traditional contract doctrines or subject to personal jurisdiction under traditional constitutional analysis.

In our article, we argue that the closely-related-and-foreseeable test has created a parallel due process universe in which non-signatories are subject to a far lower standard of connection to the forum state, simply because of their proximity to a forum selection clause. We advocate closer scrutiny of doctrines under which non-signatories are subject to personal jurisdiction, including the suggestion that non-signatories should benefit from an application of the minimum contacts standard, an analysis that would force courts to reckon with the specific ways in which a non-signatory’s relationship to the contract and its signatories does (or does not) amount to contacts such as a purposeful availment of the forum.

The Meta-Debate Over the Closely-Related-and-Foreseeable Test

As courts, meanwhile, have continued to grapple with whether to apply or adopt the closely-related-and-foreseeable test, a “meta” debate has arisen over whether courts are in fact divided about whether and how to apply this test. Two recent decisions, issued by happenstance on the same day, illustrate the new “meta” dimension over the controversy.

In Franlink, Inc. v. BACE Services, the Fifth Circuit considered whether to adopt the closely-related-and-foreseeable test. The court noted in great detail the reasons to be skeptical of test: that other courts have described it as “vague”; that many courts have “applied the theory with little discussion or analysis”; that some courts have expressed concerns about the tension between the closely-related test and conventional due process analysis; and that academic commentary has questioned the utility and constitutionality of the test. All this led the court to conclude that “there is good reason to be dubious of the [closely-related-and-foreseeable test].” But from there, the court went on to adopt and apply the doctrine, primarily on the theory that the doctrine enjoys widespread consensus in the circuit courts, and to refuse to apply the closely-related test would create a circuit split, a result to be avoided under Fifth Circuit precedent.

It is debatable whether a circuit split is sufficient justification for adopting a doctrine that the court otherwise recognizes as vague and dubious—particularly since all of the other federal courts of appeal to have endorsed the doctrine have done so in cases where the non-signatory was clamoring to be covered by the clause in the context of a motion to dismiss or transfer, rather than cases in which the non-signatory is resisting enforcement and the exercise of personal jurisdiction. Putting even that question aside, one might still question whether the Fifth Circuit is even correct in its characterization of the doctrine as one for which there is widespread adoption and consensus.

Almost as if to answer this question, Judge Shelby of District of Utah in Delta Pegasus v. Netjets declined to adopt and apply the closely-related-and-foreseeable test to assert personal jurisdiction over a non-signatory defendant. Where the Fifth Circuit saw consensus, the District of Utah saw a doctrine that “appears to be both ill-defined and inconsistently applied across jurisdictions.” The court went on to describe the existence of a circuit split accurately:

The U.S. Courts of Appeals in the Second, Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits have all adopted some form of the doctrine, as have several state appellate courts.  However, the First, Third, Fourth, Fifth and Tenth Circuit Courts of Appeal have not adopted the closely-related-and-foreseeable test (though there are instances of district courts in those circuits applying some version of the test). Of note, the Third Circuit has expressly disavowed the “closely related parties doctrine” and recently adopted a rule that is logically incompatible with the doctrine by pronouncing that “a forum-selection clause can be enforced only by the signatory to the agreement.

What, then, accounts for the Fifth Circuit’s approach? Perhaps the siren song of litigation efficiency is just too irresistible for some of the federal courts. The allure of widespread adoption and enforcement of forum selection clauses has been engrained in a half-century of American jurisprudence. The presence of non-signatories is seen as a minor irritant, but one that, given sufficient analytical attention, could upset the apple cart of litigation efficiency and private party ordering that the broad use of forum selection clauses promised. Or maybe it is that, conceptually, non-signatories are uncomfortably similar to many of the signatories against whom forum selection clauses are routinely enforced – consumers, employees, or other private persons with little bargaining power – who “agree” to forum selection clauses in take-it-or-leave-it boilerplate contracts over which they have no negotiating power and probably have not read.

Whatever the cause, the Fifth Circuit decision represents an unfortunate doctrinal turn. Having found many of the arguments in favor of the closely-related test lacking, the Fifth Circuit opted for an approach in which mischaracterizing the test as widely-adopted (and perhaps even well-settled) takes the place of more searching analysis – the searching analysis that the court itself acknowledges is missing from many prior decisions that dealt with the issue in the context of a motion to transfer or dismiss. One hopes that more courts will follow the lead of the District of Utah and grapple with the issue itself, rather than forging a new narrative of consensus in the hopes that the narrative will eventually become the consensus itself.