Franchise Agreement
Choice of Forum Clause (Forum Selection)
Non-Signatories Bound?
Closely-Related Doctrine
Equity
Personal Jurisdiction
Direct-Benefits Estoppel (Fn. 9)
Agency, Third-Party Beneficiary Law, and Equitable Estoppel
Circuit Split
Appeal from the United States District Court for the Southern District of Texas USDC No. 4:19-CV-4593
This case presents one primary question: whether non-signatories to a franchise agreement may be bound to the contract’s choice of forum provision under the equitable doctrine that binds non-signatories who are “closely related” to the contract. We conclude such non-signatories may be bound to a forum selection clause (…).
The forum selection clause stated, in bolded, all capital letters, that: Franchisee and its owners agree that Link may institute any action against Franchisee or its owners in any state or federal court of general jurisdiction in (a) the State of Texas, or (b) in the state where Franchisee has its principal place of business, or (c) within such state and in the judicial district in which Link has its principal place of business at the time the action is commenced, and Franchisee (and each owner) irrevocably submits to the jurisdiction of such courts and waives any objection Franchisee (or such owner) may have to either jurisdiction or venue in such courts. Nonetheless, Franchisee and its owners agree that Link may enforce this agreement in the courts of the State of Texas. Following these lines, the clause returned to standard typeface and stated that “FRANCHISEE acknowledges and agrees that this Section shall survive the termination or expiration of this Agreement.”
The district court held that, under the closely-related doctrine, the non-signatories were “inextricably intertwined and closely related such that it is foreseeable they would be bound to the terms of the forum-selection clause.” This “closely-related” doctrine has “permitted non–signatories to an agreement to be bound by, and to enforce, forum selection clauses where, under the circumstances, the non–signatories enjoyed a sufficiently close nexus to the dispute or to another signatory such that it was foreseeable that they would be bound.” Fasano v. Li, No. 20-3131, 2022 WL 3692850, at *11 (2d Cir. Aug. 26, 2022); see also Stellar Restoration Servs. v. Courtney, 533 F. Supp. 3d 394, 424 (E.D. Tex. 2021) (stating that the closely-related doctrine may also be established if the non-signatory’s conduct is “‘closely related’ to the contractual relationship”).
Our court has never recognized the closely-related doctrine. All other circuit courts to have considered the doctrine, however, have recognized it in one way or another. See In re McGraw-Hill Glob. Educ. Holdings LLC, 909 F.3d 48, 63 (3d Cir. 2018); Magi XXI, Inc. v. Stato della Citta del Vaticano, 714 F.3d 714, 723 (2d Cir. 2013); Marano, 254 F.3d at 757–58 (8th Cir.); Lipcon v. Underwriters at Lloyd’s, London, 148 F.3d 1285, 1299 (11th Cir. 1998); Baker v. LeBoeuf, Lamb, Leiby & Macrae, 105 F.3d 1102, 1106 (6th Cir. 1997); Hugel v. Corp. of Lloyd’s, 999 F.2d 206, 209–10 (7th Cir. 1993); Manetti-Farrow, Inc. v. Gucci Am., Inc., 858 F.2d 509, 514 n.5 (9th Cir. 1988). Link asks us to join these circuits.
Although most circuits have adopted the closely-related doctrine, they have usually done so without in-depth explanation of the theory. See, e.g., Marano, 254 F.3d at 757–58 (finding a plaintiff closely related when he was “a shareholder, officer, and director” of a signatory); Hugel, 999 F.2d at 209–10 (concluding that two plaintiffs were closely related because a signatory was “President and Chairman of the Board” of the plaintiffs and owned almost all of the plaintiffs’ stock); Manetti-Farrow, 858 F.2d at 514 n. 5 (writing, in three-sentence footnote, that multiple defendants were closely related). The Seventh and the Third Circuits, however, have made an effort to more fully explain the doctrine and to indicate its proper employment. The Seventh Circuit addressed the closely-related theory in Adams v. Raintree Vacation Exch., LLC, 702 F.3d 436 (7th Cir. 2012) (Posner, J.). The court gave three reasons why allowing closely-related non-signatories to invoke a forum selection clause is an appropriate equitable theory. First, without such a principle, forum selection clauses could “easily be evaded.” Id. at 441; see also Fitness Together Franchise, LLC v. EM Fitness, LLC, No. 1: 20-cv-02757-DDD-STV, 2020 WL 6119470, at *4 (D. Colo. Oct. 16, 2020) (describing a benefit of the theory as preventing “parties to contracts from using evasive, formalistic means lacking economic substance to escape contractual obligations” (citations and quotations omitted)). Second, forbidding non-signatories to invoke, or to be bound, to these clauses would “undermine the contribution that forum selection clauses have been praised for”—providing “certainty in commercial transactions.” Adams, 702 F.3d at 441. Finally, judicial efficiency counsels to recognize the theory as litigating the same case in one court is preferable to litigating the same case in two different courts. Id. at 443. The Seventh Circuit, after noting these equitable justifications for the closely-related doctrine, moved on to give some shape to the doctrine. The Seventh Circuit, in its words, “decomposed” the closely-related doctrine’s admittedly “vague standard” “into two reasonably precise principles”—affiliation and mutuality. Id. at 439. The court defined affiliation as “common ownership.” Id. It noted, however, that common ownership alone is insufficient for “a nonparty to a contract to be able to invoke, or be bound by, a clause in the contract.” Id. at 440. In defining the principal of mutuality, the court relied on the agency concept of “secret principals.” Id. at 442. The Third Circuit, on the other hand, basically adopts the Delaware Chancery Court’s factors for determining whether a non-signatory is so “closely related” as to be bound to a contract’s forum selection clause McGraw-Hill, 909 F.3d at 62–63. These factors include: “The non-signatory’s ownership of the signatory, its involvement in the negotiations, the relationship between the two parties and whether the non-signatory received a direct benefit from the agreement.” Id. at 63 (determining that without control or involvement in the contract’s origin or benefits there is “precious little basis for applying the closely related parties doctrine”). Additionally, the Third Circuit concluded that “a foreseeability finding in the context of forum selection clauses must have some evidentiary basis, other than pure speculation, that the party sought to be bound had an awareness of the clause, its contents, and that it might be defensively invoked.” Id. at 65 (emphasis added). In sum, the Seventh and Third Circuits, in giving some structure to the closely-related doctrine’s “vague standard,” have considered: common ownership, involvement in the agreement’s negotiations, signatory status of the party opposing the forum selection clause, the type of claims and allegations at issue, control by secret principals, the posture of the case, direct benefits received, and awareness of the agreement and its relevant terms. Other circuits in their brief assessments have considered similar factors. See, e.g., Magi, 714 F.3d at 723 (holding that a party was closely related on account of approval rights over the contractual content, awareness of the designated forum, and involvement in breach of contract); Marano, 254 F.3d at 757–58 (finding a plaintiff to be closely related because (1) he was “a shareholder, officer, and director” of a signatory, and (2) he brought suit under the agreements in question alongside other signatories); Hugel, 999 F.2d at 210 (emphasizing a signatory’s control over two plaintiffs both financially, through stock ownership, and by being “President and Chairman of the Board” when assessing if the two plaintiffs were closely related). It does appear that the various factors relevant in these respective cases have been considered holistically with no particular test emerging as definitive.
Notwithstanding its recognition by federal courts, however, the closely-related theory is not without its critics. Unlike the Seventh and Third Circuits, most courts have, as we have said, applied the theory with little discussion or analysis. Such treatment has led some lower courts to criticize the theory as “so vague as to be unworkable.” Fitness Together Franchise, 2020 WL 6119470, at *5 (quoting Dos Santos v. Bell Helicopter Textron, Inc., 651 F. Supp. 2d 550, 556 (N.D. Tex. 2009)); see also Dos Santos, 651 F. Supp. 2d at 557 (commenting that the doctrine resides in “an area of the law dominated by generalized statements that provide little guidance”). Such vagueness, moreover, has been particularly troubling given its “tension with the Supreme Court’s approach in the related minimum-contacts context.” Fitness Together Franchise, 2020 WL 6119470, at *5. Legal academics have also raised concerns with the “closely-related” doctrine. The absence of the non-signatory’s consent presents a due process problem by forcing a party to litigate in a forum that would otherwise lack personal jurisdiction. John F. Coyle & Robin J. Effron, Forum Selection Clauses, Non-Signatories, and Personal Jurisdiction, 97 NOTRE DAME L.REV. 187, 213 (2021) (“The closely-related-and-foreseeable test to assert personal jurisdiction over non-signatory defendants is impossible to reconcile with recent Supreme Court precedents relating to personal jurisdiction with respect to out-of-state-defendants.”). As an alternative to the closely-related doctrine, these professors suggest that “where the ‘close relationship’ is one in which the non-signatory is working functions more or less as a unit with the signatory, the relationship should be expressed and analyzed using the more familiar tools of agency, third-party beneficiary law, and equitable estoppel.” Id. at 224.
Although there is good reason to be dubious of the doctrine, the fact that it has been recognized by all other circuits to have considered it, invokes a strong reason for us to apply it in this circuit. We, as a court, “are always chary to create a circuit split.” Gahagan v. United States Citizenship & Immigr. Servs., 911 F.3d 298, 304 (5th Cir. 2018) (quoting United States v. Graves, 908 F.3d 137, 142 (5th Cir. 2018)); see also United States v. Thomas, 939 F.3d 1121, 1130 (10th Cir. 2019) (“We should not create a circuit split merely because we think the contrary arguments are marginally better.”). Further, we must acknowledge that the doctrine can serve a purpose in producing equitable results, as earlier noted. Thus, prudence and judicial modesty caution against singularly swimming against this tide of authority. Accordingly, we turn first to give articulation of the doctrine as applicable here; and then to apply it to each of the non-signatories, Morton, JTL, and PayDay.
We repeat once again that for the doctrine to bind a non-signatory to a forum selection clause, first, “the party must be ‘closely related’ to the dispute such that it becomes ‘foreseeable’ that it will be bound.” Hugel, 999 F.2d at 209 (citing Manetti–Farrow, 858 F.2d at 514 n.5). What remains, however, is filling in the blanks. Borrowing from the precedents, including the Third and Seventh Circuits, we extract a few fundamental factors applicable here that we will consider in determining whether these non-signatories are closely related: (1) common ownership between the signatory and the non-signatory, (2) direct benefits obtained from the contract at issue, (3) knowledge of the agreement generally and (4) awareness of the forum selection clause particularly. See Adams, 702 F.3d at 439–42; McGraw-Hill, 909 F.3d at 63. Of course, the closely-related doctrine is context specific and is determined only after weighing the significance of the facts relevant to the particular case at hand. Thus, in line with our general understanding of equitable doctrines, we do not set out a rigid test for applying the closely-related doctrine. Instead, we merely attempt to give it definition in the context of this case.
(This court has indicated that non-signatories should only have contractual provisions enforced against them in “rare circumstances.” Bridas S.A.P.I.C. v. Gov’t of Turkm., 345 F.3d 347, 358 (5th Cir. 2003). Moreover, given the persuasive concerns about the closely-related doctrine and that there are other avenues or forums to address Link’s grievances against the non-signatories, a narrow application of the doctrine is both appropriate and necessary. (Fn. 8)).
(…) We hold that the closely-related doctrine does not bind Morton to the forum selection clause of the franchise agreement. It follows that the district court lacked personal jurisdiction over Morton, and the entire judgment is reversed and vacated as to him.
(Direct-benefits estoppel applies when “non-signatories who, during the life of the contract, have embraced the contract despite their non-signatory status but then, during litigation, attempt to repudiate the arbitration clause in the contract.” Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517–18 (5th Cir. 2006). This court, however, has limited direct-benefits estoppel to when “the nonsignatory has brought suit against a signatory premised in part upon the agreement.” Bridas, 345 F.3d at 362. Here Link, a signatory, initiated suit against the non-signatories, so direct-benefit estoppel is inapplicable to establish personal jurisdiction. Furthermore, we have noted that, in the context of the closely-related doctrine, Morton and JTL received no direct benefit from the Link/BACE contract. Fn. 9)).
(U.S. Court of Appeals for the Fifth Circuit, Sept. 28, 2022, Franlink Inc. v. Bace Services, Inc., Docket No. 21-20316)
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