Non-Signatories, Forum Selection Clauses, and Personal Jurisdiction in the SDNY
June 8, 2022
Over the past few decades, U.S. courts have adopted a new legal test that makes it easier to bind individuals to forum selection clauses in contracts they did not sign. This test posits that a non-signatory is bound by a forum selection clause if it is so “closely related” to the signatory that it was “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. While the use of this test is unobjectionable in some contexts, it is deeply problematic in others.
General Electric International, Inc. v. Thorco Shipping America, Inc.
The use of the closely-related-and-foreseeable test is particularly objectionable when it is invoked as basis for personal jurisdiction. The recent decision in General Electric International, Inc. v. Thorco Shipping America, Inc. is a case in point. General Electric International, Inc. (“GE”) contracted with Thorco Shipping America, Inc. (“Thorco America”) to transport goods from Vietnam to Taiwan. The shipping contract contained a forum selection clause selecting the courts in New York. After the goods were damaged in transit, General Electric brought a lawsuit in the U.S. District Court for the Southern District of New York (Judge John P. Cronan) against two defendants: (1) Thorco America, and (2) Thorco Projects A/S (“Thorco Denmark”). Thorco Denmark is incorporated and headquartered in Denmark.
Thorco Denmark moved to dismiss the suit for lack of personal jurisdiction. It argued that it lacked minimum contacts with New York and was not bound by the forum selection clause because it was not a party to the shipping contract. GE argued in response that the court could assert personal jurisdiction over Thorco Denmark because it was so “closely related” to Thorco America that it was “foreseeable” that it would be bound by the New York forum selection clause. In support of this argument, GE noted that Thorco Denmark (1) owned 75% of Thorco America, (2) held itself out as maintaining an office in Texas, and (3) was doing business through Thorco America.
The district court denied Thorco Denmark’s motion to dismiss, though without prejudice to its ability to file renewed motion later in the proceedings. The court held that GE had “taken a substantial step” towards establishing that Thorco Denmark was so “closely related” to Thorco America to be bound by the forum selection clause. It concluded, however, that additional jurisdictional discovery and briefing were needed before a definitive conclusion could be reached.
The Closely-Related-and-Foreseeable Test
The district court’s invocation of the closely-related-and-foreseeable argument in this context is constitutionally problematic. As I explained in a recent paper co-authored with Robin Effron, this test was first developed in a very different doctrinal setting. Originally, the test was used in cases where the party seeking enforcement of the clause was a defendant seeking to have the case dismissed or transferred to the forum named in the clause. In such cases, there is no due process constraint on the ability of courts to bring (willing) non-signatory defendants within the ambit of the clause. When a plaintiff seeks to use the test to assert personal jurisdiction over a non-signatory defendant, by contrast, the ability of courts to enforce the clause against (unwilling) non-signatories is limited by U.S. Supreme Court decisions interpreting the Due Process Clause of the Fourteenth Amendment. This difference in context is vitally important but frequently overlooked. Significantly, the Second Circuit has never endorsed the use of the closely-related-and-foreseeable test in the personal jurisdiction context.
The use of the test in this context is troubling for three reasons. First, the Supreme Court has held that due process requires that there be meaningful contacts between the defendant and the forum state. The closely-related-and-foreseeable test focuses exclusively on the contacts between the defendant and the contract containing the forum selection clause. These are not the same. Second, the Supreme Court has stated that “foreseeability alone” has never been a sufficient benchmark for personal jurisdiction. The closely-related-and-foreseeable test relies heavily on the concept of foreseeability. Third, several courts of appeal have held that a close relationship between business entities is generally an insufficient basis for a court to impute the forum contacts of one business entity to another unless one entity is the “alter ego” of the other. To hold that a parent company is subject to personal jurisdiction in a place merely because it is “closely related” to a corporate subsidiary is to obliterate this carefully calibrated distinction.
While there are doctrines separate and apart from the closely-related-and-foreseeable test that could bind Thorco Denmark to the forum selection clause, many of them do not apply on these facts. Thorco Denmark was not a third-party beneficiary to the shipping agreement. It is not equitably estopped from denying the enforceability of the forum selection clause. Thorco America was not acting as Thorco Denmark’s agent when it signed the agreement. Thorco Denmark is not a successor entity to Thorco America. Thorco Denmark never voluntarily assumed the obligations of the shipping contract. Thorco America is not the alter ego of Thorco Denmark.
The only doctrine that could potentially prove helpful to GE is the doctrine of incorporation by reference. Thorco Denmark was a party to a separate contract with GE that incorporated the terms of the shipping contract by reference. This contract could potentially bind Thorco Denmark to the New York forum selection clause in the shipping contract. Whether it will actually do so is unclear because the other contract clearly stated that all disputes were to be resolved by arbitration in London. The district court did not address this dissimilarity in its decision because there was no need; the closely-related-and-foreseeable test offered a less demanding path to the same destination. If the court should conclude that that test is inapplicable, however, it will have to decide whether incorporation by reference can justify the assertion of personal jurisdiction on the facts presented.
The good news is that there is still time to get this right. The district court has yet to render a final decision on the motion to dismiss. That court should not, however, rely on the closely-related-and-foreseeable test to decide the motion. While the test has its place, it should not be used to evaluate whether a non-signatory defendant is subject to personal jurisdiction in the jurisdiction named in the forum selection clause.