Splitting the Difference on the Closely-Related-and-Foreseeable Test

Image by Angelo Giordano from Pixabay

Over the past decade, the lower federal courts have repeatedly considered whether non-signatories to a contract are bound by a forum selection clause if they are so “closely related” to a signatory that it is “foreseeable” that they would be bound. In some cases, their decisions are defensible, as discussed here. In others, their decisions are indefensible, as discussed here and here and here and here.

Versatex, LLC v. Duracell Manufacturing., LLC, a recent decision by the U.S. District Court for the Southern District of Ohio (Judge Matthew W. McFarland), splits the difference. It is defensible in some respects and indefensible in others. On the one hand, the decision correctly holds that the closely-related-and-foreseeable test may be invoked by a non-signatory plaintiff to assert personal jurisdiction over a signatory defendant. On the other hand, the decision incorrectly holds that this test may be applied to benefit a non-signatory notwithstanding the existence of a no-third-party-beneficiaries clause in the agreement.

Invoking the Clause Against a Signatory Defendant

In a 2021 article that I co-authored with Robin Effron, we identified four scenarios where a U.S. court might apply the closely-and-related-and-foreseeable test:

1. Non-Signatory Defendant Invokes Clause Against Signatory Plaintiff
2. Non-Signatory Plaintiff Invokes Clause Against Signatory Defendant
3. Signatory Defendant Invokes Clause Against Non-Signatory Plaintiff
4. Signatory Plaintiff Invokes Clause Against Non-Signatory Defendant

The second scenario is by far the least common. It is rare for a non-signatory plaintiff to invoke a forum selection clause as a means of obtaining personal jurisdiction over a signatory defendant. This is, however, precisely the scenario presented in Versatex.

The plaintiffs were Versatex, LLC (Versatex) and XLC Services, LLC (XLC). Both entities were wholly owned subsidiaries of the same parent company. They also shared the same principal place of business in Cincinnati, Ohio. In 2014, Versatex entered into a services agreement with Duracell Manufacturing (Duracell), which was headquartered in Chicago, Illinois. That agreement contained a forum selection clause choosing the courts of Ohio. After performing the requested services, Versatex sent an invoice to Duracell asking it to remit payment to XLC. When these payments were not forthcoming, Versatex and XLC brought an action against Duracell in Ohio state court. This action was subsequently removed to federal court based on diversity jurisdiction.

Duracell moved to dismiss XLC’s claims, arguing that courts in Ohio lacked personal jurisdiction with respect to those claims. XLC responded that Duracell had consented to personal jurisdiction in Ohio because the services contract between Duracell and Versatex contained an Ohio forum selection clause. Although XLC was not a party to that contract, it argued that it could take advantage of the clause because it was so “closely related” to Versatex that it was “foreseeable” to Duracell that a situation might arise in which it and XLC would become involved in any contract dispute. The question thus presented to the court was whether a non-signatory plaintiff (XLC) could invoke an Ohio forum selection clause against a signatory defendant (Duracell) as a means of obtaining personal jurisdiction in Ohio.

The court ruled that it could. It held that XLC was closely related to the parties and the dispute because (1) it played an integral role in helping Versatex fulfill its contractual obligations, (2) Duracell remitted payments to XLC and communicated with XLC, and (3) Versatex and XLC were owned by the same company. On these facts, the court concluded that it was reasonably foreseeable to Duracell that “situations might arise in which the non-signatory would become involved in the relevant contract dispute.”

This analysis is entirely defensible. As Robin and I explain in our article, courts may rely on the closely-related-and-foreseeable test when a non-signatory plaintiff seeks to invoke the clause against a signatory defendant:

In such cases, it is clear that the defendant has consented to jurisdiction in the chosen forum with respect to claims brought by somebody. The question is whether the defendant has consented to jurisdiction in the chosen forum with respect to claims brought by this particular plaintiff. To resolve this question, the court may inquire whether the plaintiff may invoke this clause notwithstanding the fact that it was not a party to the relevant contract. There is no obvious reason why this question may not be resolved by the closely-related-and-foreseeable test. . .  There is no issue with consent or due process on these facts. The defendant has previously consented to jurisdiction in the chosen state via the forum selection clause. The only question is whether the non-signatory plaintiff is entitled to take advantage of that prior consent.

This language fits the facts of Versatex like a glove. This part of the opinion presents no concerns.

The No-Third-Party-Beneficiaries Clause

When a contract contains a no-third-party-beneficiaries clause, the analytical framework outlined above must be revised. The overwhelming majority of courts to have considered the question have held that it is inappropriate to allow a non-signatory to invoke the closely-related-and-foreseeable test when the contract contains a clause stating that there are no third-party beneficiaries to the agreement. These courts have reasoned that it is inappropriate to allow third parties to benefit from an agreement that contains express language excluding them.

The contract between Versatex and Duracell contained the following provision:

Except as expressly provided herein, this Agreement is entered into solely between, and may be enforced only by, [Duracell] and [Versatex]. This Agreement shall not be deemed to create any rights or causes of action in or on behalf of any third parties, including without limitation employees, providers and customers of a Party, or to create any obligations of a Party to any such third parties.

This provision renders the closely-related-and-foreseeable doctrine inapplicable. XLC is a third party seeking to assert rights under the forum selection clause. Under the plain language of the contract, XLC may not do this.

This is not, however, what the court held. In its words:

While this language may speak to the foreseeability of non-signatories enforcing the forum selection clause, it is not dispositive. The District Court for the Northern District of Ohio recently wrestled with a non-signatory seeking to enforce a forum selection clause with similar third-party beneficiary language. In [Smith v. Swaffer], the Court applied the “closely related” test and held that it was “reasonably foreseeable that [the non-signatory defendant], one of the only people related to and an officer of [signatory company] with whom Plaintiffs had dealings, would seek to enforce the forum-selection clause . . . notwithstanding its third-party beneficiary language.” The Court makes a similar finding here. Considering XLC’s role in fulfilling Versatex’s obligations under the Agreement—alongside XLC’s close relationship with Versatex—the third-party beneficiary language does not foreclose XLC from enforcing the forum selection clause.

This reasoning is impossible to defend. The contract states that it shall not create any rights for non-signatories. This means that the contract does not create any rights for non-signatories. In concluding otherwise, the federal courts in Ohio have taken the position that contracting parties are powerless to prevent non-signatories from invoking the closely-related-and-foreseeable test to bring them within the scope of contracts that specifically exclude them. This conclusion is out of line with virtually every other court to have considered the question. It is also deeply troubling as a matter of basic contract law.

Conclusion

The closely-related-and-foreseeable test is sweeping the nation. Courts across the United States are asked to apply it daily and many of these cases involve litigants from outside the United States. In some cases, the courts get it right. In other cases, they get it wrong. In still other cases, such as Versatex, they split the difference.