Forum Selection Clauses, Non-Signatories, and Personal Jurisdiction in New York

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As a general rule, the law will not vest contractual rights in (or impose contractual obligations upon) individuals who are not parties to an agreement. Over the past few decades, however, the courts have had occasion to relax this rule in the context of forum selection clauses. As previously discussed here and here and at great length here, many U.S. courts now hold that a non-signatory to a contract containing a forum selection clause is bound by the clause if the non-signatory is so “closely related” to the contract signatory that it is “foreseeable” that it would be bound. The purpose of the “closely related and foreseeable” test is to promote litigation efficiency by ensuring that claims against related defendants are heard in the same forum.

This test has a role to play in contemporary litigation. When a non-signatory defendant seeks dismissal or transfer on the basis of a forum selection clause choosing the courts in another jurisdiction, for example, the courts can and should rely on the test to avoid fractured litigation proceedings. When the closely-related-and-foreseeable test is used to obtain personal jurisdiction over a non-signatory, however, this act violates the Due Process Clause of the Fourteenth Amendment.

EPAC Technologies Ltd. v. Interforum, S.A.

A lawsuit currently on appeal to the First Department in New York is a case in point. The plaintiff is EPAC Technologies, Ltd. (“EPAC”), a printing company incorporated in Malta. The defendants are (1) Editis, a group of French publishing companies; (2) Interforum, S.A., a French subsidiary of Editis; (3) Vivendi S.E. (“Vivendi”), a French corporation that is the parent company of Editis; and (4) Bolloré S.E. (“Bolloré”), a French company that is one of Vivendi’s minority shareholders. EPAC entered a contract with Editis whereby the former agreed to provide state-of-the-art, on-demand printing services to the latter. The contract contained a New York forum selection clause. When the contractual relationship soured, EPAC sued all of the defendants in New York state court.

Since the events giving rise to the dispute occurred in France, the question arose as to whether the New York courts had personal jurisdiction over the defendants. The New York courts clearly had jurisdiction over Editis because it signed the contract that contained the New York forum selection clause and that contract satisfied the criteria laid down in N.Y. General Obligations Law § 5-1402. It is not at all clear, however, why New York courts would have personal jurisdiction over Vivendi or Bolloré. They are not incorporated in New York. They are not headquartered in New York. And neither company took any actions that would give rise to specific jurisdiction in New York. Nevertheless, the plaintiff argued that the New York courts had personal jurisdiction over both Vivendi and Bolloré because they were so “closely related” to Editis that it was “foreseeable” that both companies would be bound by the New York forum selection clause in the contract between Editis and EPAC.

Limiting the Closely-Related-and-Foreseeable Test

Serious constitutional problems arise when the closely-related-and-foreseeable test is used to obtain personal jurisdiction over non-signatory defendants such as Vivendi and Bolloré. With an assist from Katie Kramer, I filed an amicus brief in the above case on behalf of myself, Bill Dodge, and Robin Effron, in which we encouraged the First Department to reconsider whether the use of the closely-related-and-foreseeable test in this context was consistent with the Due Process Clause. The amicus brief may be read in its entirety here. Our argument is summarized below.

Foreseeability

Foreseeability by itself is insufficient under existing Supreme Court doctrine to support the exercise of personal jurisdiction over an out-of-state defendant. The Supreme Court held in World-Wide Volkswagen Corp. v. Woodson that “’foreseeability’ alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.” Nevertheless, the New York courts have explained that the closely-related-and-foreseeable test passes constitutional muster as a means of obtaining personal jurisdiction over a defendant because “the concept of foreseeability is built into the closely-related doctrine, which explicitly requires that the relationship between the parties be such that it is foreseeable that the non-signatory will be bound by the forum selection clause.” The fact that the test incorporates elements of foreseeability, in our view, is not enough to satisfy due process.

Forum Contacts

There is another problem with using the closely-related-and-foreseeable test to assert personal jurisdiction over non-signatory defendants. That test does not ask about the defendant’s relationship to the forum state. Instead, it looks at the relationship to the contract. The Supreme Court reaffirmed in Bristol-Myers Squibb Co. v. Superior Court that minimum contacts demand a substantial connection between (1) the defendant, (2) the cause of action, and (3) the forum state. The mere fact that a plaintiff can prove that there is a close connection between the defendant and a contract is not enough to create a substantial connection between that defendant and the forum state. This is especially true in cases such as EPAC Technologies Ltd. v. Interforum, S.A., where the state named in the forum selection clause (New York) lacks any connection to the defendants (French) or the place of the dispute (France).

Business Entities

A third problem with relying on the test to obtain personal jurisdiction is that it provides an insufficient basis to impute the forum contacts of one business entity to another. In Daimler AG v. Bauman, the Supreme Court held that for general jurisdiction, a subsidiary’s contacts may only be imputed to a foreign corporation if the subsidiary is the “alter ego” of the parent. It takes extraordinary circumstances to pierce the corporate veil.  Under the closely-related-and-foreseeable test, however, the presence of a forum selection clause allows a court to bypass this analysis. It can hold that a corporate affiliate is subject to personal jurisdiction even when there is no evidence that one company is the alter ego of the other and no plausible case for piercing the corporate veil. It is unclear why a forum selection clause should have this effect in situations where ordinary principles of corporate law would not bind the corporate affiliate to the contract.

Conclusion

There are situations where a defendant may be subject to personal jurisdiction in New York on the basis of a forum selection clause in a contract it did not sign. The courts have at their disposal an array of legal doctrines – including agency law, alter ego doctrine, assumption, incorporation by reference, successor liability, equitable estoppel, and the law of third-party beneficiaries – that bind non-signatories to agreements that were executed by others. The courts may also use the closely-related-and-foreseeable test to bind non-signatories to forum selection clauses selecting the courts in other states. The courts should draw the line, however, at relying on this test to assert personal jurisdiction over non-signatories based solely on the fact that a corporate affiliate is a party to a contract that contains a New York forum selection clause.