U.S. Court of Appeals for the Fourth Circuit, Towers Watson & Co. v. National Union Fire Insurance Co., Docket No. 24-1302

D&O Liability Policy

 

Merger

 

Shareholders’ Class Action

 

Merger Consideration

 

Insurance Policy’s « Bump-Up Exclusion »

 

Common Fund Doctrine

 

Equity

 

Virginia Law

 

 

 

 

This case returns to us following vacatur and remand to the district court.  On remand, the district court held that the “bump-up exclusion” in the relevant directors and officers (“D&O”) liability insurance policies “unambiguously applied” to Towers Watson & Co.’s settlement with its shareholders. Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. 1:20-cv-810, 2024 WL 993871, at *9 (E.D. Va. Mar. 6, 2024). As a result, it found that Towers Watson was not entitled to indemnity coverage under those policies and granted National Union Fire Insurance Co. of Pittsburgh, Pa.’s (“National Union”) motion for summary judgment to that effect.

 

 

National Union is the primary insurer. There are also several excess insurers, but their policies “follow form” to the primary policy, “meaning that they incorporate the same terms.” Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 67 F.4th 648, 650 (4th Cir. 2023). The district court’s conclusion thus applies with equal force to all the policies. (Fn. 1).

 

 

National Union provided defense coverage for the claims against Towers Watson. What is at issue here is indemnification coverage. When we refer to coverage herein, it means indemnification coverage under the various policies. (Fn. 2).

 

 

A D&O policy, also called a management liability policy, provides coverage to “officers and directors of a corporation for claims asserted against them for wrongful acts, errors, omissions, or breaches of duty, and also. . . provides indirect coverage to the corporation for reimbursement of any monies expended to indemnify the officers and directors.” 9A Steven Plitt et al., Couch on Insurance § 131:30 n.3 (3d ed. 2024). (Fn. 4).

 

 

The term “Organization” includes the “Named Entity,” which is defined as “Towers Watson & Co.” J.A. 1401, 1427. An “Insured Person” includes any “Executive” or “Employee” of Towers Watson. J.A. 1426. A “Securities Claim” includes “Claims” alleging the violation of a “federal, state, local or foreign regulation, rule or statute regulating securities” brought against Towers Watson related to a securities interest in Towers Watson, as well as a “Derivative Suit.” J.A. 1430. A “Claim” is defined to include “a civil. . . proceeding for monetary, non-monetary or injunctive relief which is commenced by . . . service of a complaint or similar pleading.” J.A. 1422. (Fn. 5).

 

 

 

We agree with the district court that the policies’ bump-up exclusion precludes coverage for the parties’ settlement, including the portion that ultimately went toward attorneys’ fees. We therefore affirm the district court’s decision in full.

 

 

The Policy provides coverage for the “Loss of any Organization . . . arising from any Securities Claim made against such Organization for any Wrongful Act of such Organization,” and the “Loss of an Organization that arises from any Claim . . . made against any Insured Person . . . for any Wrongful Act of such Insured Person.” J.A. 1406.5 “Loss” is a defined term that includes “damages, settlements, judgments,” and defense costs. J.A. 1426. The Policy also includes what is commonly termed a “bump-up” exclusion, which generally bars coverage for losses stemming from judgments or settlements reached in connection with claims that seek an increase—or “bump up”—in the consideration paid for a security. Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 67 F.4th 648, 650 (4th Cir. 2023). The bump-up exclusion in the Policy provides: In the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased. J.A. 1427.

 

This appeal turns on the proper interpretation of that provision.

 

 

Virginia law still governs our interpretation of the Policy. See Towers Watson & Co., 67 F.4th at 653. Under Virginia law, “an insurance policy is a contract, and, as in the case of any other contract, the words used are given their ordinary and customary meaning when they are susceptible of such construction.” Hill v. State Farm Mut. Auto. Ins. Co., 375 S.E.2d 727, 729 (Va. 1989). If policy language is ambiguous, i.e., susceptible of two or more reasonable meanings, then “any doubt concerning the meaning of the policy language” must be “resolved against the insurer.” Id. at 730; Erie Ins. Exch. v. EPC MD 15, LLC, 822 S.E.2d 351, 355 (Va.  2019). This contra proferentum rule applies with particular force when construing policy exclusions, as the insurer bears the burden of proving that an exclusion applies. See TravCo Ins. Co. v. Ward, 736 S.E.2d 321, 325 (Va. 2012) (“Language in a policy purporting to exclude certain events from coverage will be construed most strongly against the insurer.” (quoting PBM Nutritionals, LLC v. Lexington Ins. Co., 724 S.E.2d 707, 713 (Va. 2012))).

 

 

That said, the Supreme Court of Virginia has “cautioned” courts to “resist” the “temptation” to “give up quickly on the search for a plain meaning by resorting to the truism that a great many words—viewed in isolation—have alternative, and sometimes quite different, dictionary meanings.” Erie Ins. Exch., 822 S.E.2d at 355. Otherwise, “the contra proferentem thumb-on-the-scale would apply to nearly every interpretation of nearly every insurance policy.” Id. Policy language is therefore ambiguous only where the “competing interpretations . . . are ‘equally possible’ given the text and context of the disputed provision.” Id. at 356 (quoting Appalachian Reg’l Healthcare v. Cunningham, 806 S.E.2d 380, 386 n.10 (Va. 2017)). In other words, the mere fact that the parties disagree on the meaning of the terms of a provision does not necessarily render those terms ambiguous. TM Delmarva Power, L.L.C. v. NCP of Va., L.L.C., 557 S.E.2d 199, 200 (Va. 2002).

 

 

In the end, we agree with the district court that the settlements do fall within the Policy’s bump-up exclusion, thus barring indemnity. Our analysis begins with the language of the bump-up exclusion: In the event  of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or  substantially all the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased. J.A. 1427. By its terms, this provision establishes two conditions that must be satisfied before the exclusion is triggered. First, there must be a “Claim” alleging that the consideration paid for an acquisition was inadequate. Id. And second, the settlement of such claim must “represent” an “effective increase” in the “price or consideration” shareholders received for that acquisition. Id. Beginning with the first condition, there is no real dispute that the shareholders filed a “Claim” alleging that the consideration paid for Willis’ acquisition of Towers Watson was inadequate. See, e.g., Opening Br. 32–33 (acknowledging that the first element “looks only to the allegations of the complaint,” and that the Court can therefore “take the first condition as a given”); Response Br. 26 (noting that Towers Watson “no longer disputes that both the Virginia and Delaware actions were predicated fundamentally on Towers Watson’s alleged failure to secure adequate consideration for the shares shareholders were forced to relinquish in the transaction”). The first condition is therefore clearly satisfied.

 

 

The second condition presents a more difficult question. In particular, the parties spar over the meaning and import of the terms “represent” and “effectively increase.” J.A. 1427. Since the Policy does not define either term, we look to their dictionary definitions for interpretive guidance. Towers Watson, 67 F.4th at 653–54 (acknowledging Virginia courts’ “established practice of looking to an undefined contractual term’s dictionary definition” to ascertain its “ordinary and accepted meaning” (quoting Lower Chesapeake Assocs. v. Valley Forge Ins. Co., 532 S.E.2d 325, 330 (Va. 2000))). For its part, “represent” is defined as “to constitute or amount to,” or “to symbolize or stand in place of.” Represent, Black’s Law Dictionary (12th ed. 2024); see Represent, Merriam-Webster’s Dictionary (last accessed May 12, 2025) https://www.merriamwebster.com/dictionary/represent [https://perma.cc/CL2H-QF8L] (defining “represent” as “to serve as a sign or symbol of”). And “effectively” is defined as “in effect, virtually,” Effectively, Merriam-Webster’s Dictionary (last accessed May 12, 2025) https://www.merriam-webster.com/dictionary/effectively [https://perma.cc/U9S3-FDLZ], “the real result of a situation,” Effectively, Cambridge English Dictionary (last accessed May 12, 2025) https://dictionary.cambridge.org/us/dictionary/english/effectively [https://perma.cc/73XT-2P2Y], and “having a certain result in reality, though not in theory,” id.

 

 

With these definitions in hand, we have little trouble concluding that the bump-up exclusion’s second condition is satisfied. That’s because the terms “represent” and “effectively increase,” particularly when read together, indicate that we must look to the “real result of the situation,” not the theoretical one. See Effectively, Cambridge English Dictionary, supra (emphasis added); Represent, Black’s Law Dictionary, supra. And if the “real result” of the settlements is that the shareholders receive additional consideration for their relinquished shares, this condition is satisfied. As the district court observed, that’s exactly what happened here. The shareholders, claiming their shares were devalued in the merger process because of Haley’s conflict of interest, sued Towers Watson. Their lawsuit sought to rectify that perceived shortfall. That is, they sought what was effectively an increase (or “bump-up”) in the consideration paid for their shares. The settlements they eventually received constituted—i.e., “represented”—precisely such a bump-up.  J.A. 1427; see, e.g., J.A. 1687 (analysis from the Virginia plaintiffs’ damages expert “estimating damages as the minimum incremental amount that Towers Watson shareholders should have expected to obtain or retain based on a full disclosure of the information that Lead Plaintiff argues should have been disclosed”). Because both requirements are met, the bump-up exclusion applies and Towers Watson is not entitled to indemnification for the settlements.

 

 

Relatedly, interpreting the bump-up exclusion in such a way does not render the Policy coverage illusory. As Insurers note, the exclusion does not impact the Policy’s coverage for the costs of defending against securities claims alleging inadequate consideration. Indeed, Insurers have already paid out millions in covered defense costs here. Moreover, to argue that the exclusion renders the Policy’s coverage illusory is to suggest that all securities claims involve allegations of inadequate consideration in corporate acquisitions. But as Insurers note, most securities claims do not arise out of corporate acquisitions and therefore do not implicate bump-up exclusions.

 

 

Towers Watson raises a second issue regarding the district court’s resolution of the attorneys’ fee question under the common fund doctrine. The district court found that the $17+ million in settlement money that went toward attorneys’ fees fell within the ambit of the bump-up exclusion by way of that doctrine. This finding led the district court to conclude that indemnity was barred for the whole of the settlements reached, not just the portion that “actually reached the shareholders.” Towers Watson & Co., 2024 WL 993871, at *9. We discern no legal error in this conclusion and therefore affirm. The common fund doctrine derives from principles of equity and “allows a court to award ‘a reasonable attorney’s fee’ to ‘a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client . . . from the fund as a whole.’” Brundle ex rel. Constellis Emp. Stock Ownership Plan v. Wilmington Tr., N.A., 919 F.3d 763, 785 (4th Cir. 2019) (quoting Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (1980)). A common fund recovery thus “places the plaintiffs’ cost of litigation on the recovering beneficiaries of a lawsuit.” Id. at 786.

 

 

The district court invoked this doctrine to conclude that the full $90 million settlement fund—$17,626,730.78 of which ultimately went toward attorneys’ fees— “represents the amount by which consideration was effectively increased.” Towers Watson & Co., 2024 WL 993871, at *9. It did not err in doing so. In short, the district court rightly observed that, “regardless of how the additional consideration was distributed once paid to the beneficiaries, it nevertheless constitutes in toto an increase in the consideration paid for the merger.” Id.

 

 

Secondary sources: Steven Plitt et al., Couch on Insurance § 131:30 n.3 (3d ed. 2024).

 

 

 

(U.S. Court of Appeals for the Fourth Circuit, May 28, 2025, Towers Watson & Co. v. National Union Fire Insurance Co., Docket No. 24-1302, Published)

 

U.S. Court of Appeals for the Ninth Circuit, Milos Product Tanker Corp. v. Valero, Docket No. 23-55655

Quantum Meruit

Quasi-Contract

Equity

Unjust Enrichment

 

 

(…) See In re De Laurentiis Ent. Grp., Inc., 963 F.2d 1269, 1272 (9th Cir. 1992) (“Quantum meruit (or quasi-contract) is an equitable remedy implied by the law under which a plaintiff who has rendered services benefiting the defendant may recover the reasonable value of those services when necessary to prevent unjust enrichment of the defendant.”). Valero paid cost and freight charges to Koch when it purchased the jet fuel under CFR terms. Because Valero was not unjustly enriched, Milos cannot recover from Valero under a quasi-contract.

 

(U.S. Court of Appeals for the Ninth Circuit, Sept. 18, 2024, Milos Product Tanker Corp. v. Valero, Docket No. 23-55655, for Publication)

U.S. Court of Appeals for the Ninth Circuit, Brown v. Commissioner of Internal Revenue, Docket No. 22-70001

 

Tax Law

 

Notices of Federal Tax Lien

 

Collection Due Process (“CDP”) Hearing  

 

Offer in Compromise (“OIC”)

 

The Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”), Pub. L. 109–222, Requires a Taxpayer Who Makes an OIC to Submit a Payment of Twenty Percent of the Value of the OIC

 

TIPRA Payments Are Not Refundable Deposits

 

Notice of Determination (“NOD”) Which Allows to Appeal to the Tax Court to Contest the Liens and the Return of an OIC

 

Tax Court Jurisdiction

 

Equity

 

 

 

 

Appeal from a Decision of the United States Tax Court

 

 

Michael D. Brown owes approximately $50,000,000 in unpaid federal taxes for various years between 2001 and 2011. In 2016, after the Internal Revenue Service (“IRS”) placed two tax liens on his property, Brown submitted an offer in compromise (“OIC”) to the Commissioner of Internal Revenue. An OIC allows a taxpayer to settle his outstanding tax liabilities for less than their total value if the IRS determines there are doubts as to collectability or that full payment would be inequitable or cause unusual economic hardship. IRM 33.3.2 (Aug. 6, 2019) (Offers in Compromise); IRS Form 656 (Offer in Compromise) at 3. Brown’s OIC offered to settle his $50,000,000 outstanding tax liability for a payment of $400,000, claiming that there were doubts as to collectability. The Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”), Pub. L. 109–222, requires a taxpayer who makes an OIC to submit a payment of twenty percent of the value of the OIC, in Brown’s case $80,000. See 26 U.S.C. § 7122(c)(1)(A)(i). As part of the OIC process, the taxpayer must acknowledge that he understands that the TIPRA payment will not be refunded if the OIC is not accepted. Brown acknowledged the following on his signed OIC submission form: “I voluntarily submit the payments made on this offer and understand that they will not be returned even if I withdraw the offer or the IRS rejects or returns the Offer.” IRS Form 656 (Offer in Compromise) at 5. The Commissioner returned Brown’s OIC after concluding that it was inappropriate to compromise his tax liability at that time because the existence of ongoing audits of Brown’s businesses made the overall amount of his tax liability uncertain. The IRS, in accordance with the terms of the OIC, did not return Brown’s $80,000 TIPRA payment. This litigation is Brown’s attempt to retrieve that money. In a previous appeal, we held that the IRS’s decision to return Brown’s OIC was proper but remanded to allow the Tax Court to determine if it had jurisdiction to refund Brown’s $80,000 TIPRA payment. Brown v. Comm’r, 826 F. App’x 673, 674 (9th Cir. 2020). On remand, the Tax Court held that it did not have jurisdiction to refund the payment because the power to do so had not been specifically granted to it by any statute. Brown v. Comm’r, 122 T.C.M. (CCH) 199, at *7 (2021). We agree and therefore we affirm.

 

 

This litigation began in 2015 when the IRS filed the first of two notices of federal tax lien (“NFTLs”) against Brown’s property as a consequence of Brown’s unpaid taxes. In response to the NFTLs, Brown requested a Collection Due Process (“CDP”) hearing and indicated that he intended to make an OIC. At that time, there were multiple ongoing audits of Brown’s businesses. In November 2016, Brown submitted his OIC. As noted, his OIC offered to settle his $50,000,000 tax liability for $400,000 and included the required twenty percent ($80,000) TIPRA payment. The law is clear that TIPRA payments are not refundable deposits but rather are non-refundable payments of tax. See Isley v. Comm’r, 141 T.C. 349, 372 (2013) (“The TIPRA payment constitutes a nonrefundable, partial payment of the taxpayer’s liability . . .”) (citing H.R. Conf. Rept. No. 109–455, at 234 (2006)); see also 26 U.S.C. § 7122(c)(2)(A)–(C) (establishing that any TIPRA payment goes to the taxpayer’s liabilities). The IRS accepted Brown’s OIC for processing but decided that it should be returned because of the ongoing audits. After the OIC was returned, Brown received a Notice of Determination (“NOD”) which permitted him to appeal to the Tax Court to contest the liens and the return of his OIC. See 26 U.S.C. § 6330(d)(1).

 

 

(…)

 

 

As the Tax Court correctly noted, it is a court of limited jurisdiction and possesses no general equitable powers. See Comm’r v. McCoy, 484 U.S. 3, 7 (1987). In other words, it has only the jurisdiction specifically granted by statute and lacks the authority to expand upon that statutory grant. Id.; see 26 U.S.C. § 7442. We have been clear that “the Tax Court’s jurisdiction is defined and limited by Title 26 and it may not use general equitable powers to expand its jurisdictional grant beyond this limited Congressional authorization. It may exercise its authority only within its statutorily defined sphere.” Est. of Branson v. Comm’r, 264 F.3d 904, 908 (9th Cir. 2001).

 

 

Brown argues that 26 U.S.C. §§ 6320 and 6330 give the Tax Court jurisdiction to refund his TIPRA payment. This is not so. Section 6320 merely requires that taxpayers be given notice and an opportunity for a hearing when a tax lien is filed. And section 6330 deals with procedures governing levies on property and administrative reviews of both liens and levies. See 26 U.S.C. § 6320(c) (explaining that provisions of § 6330 shall apply to the review of tax-lien hearings). Nothing in either section grants the Tax Court the power to refund TIPRA payments.1

 

 

1Cf. 26 U.S.C. § 6512(b)(1) (giving the Tax Court, in its deficiency jurisdiction, the power to determine an overpayment and refund such overpayment to the taxpayer).

 

 

Thus, the Tax Court lacks jurisdiction to refund TIPRA payments because there is no specific statutory grant conferring jurisdiction to do so. We have considered Brown’s remaining arguments and find them to be without merit.

 

 

 

 

(U.S. Court of Appeals for the Ninth Circuit, Brown v. Commissioner of Internal Revenue, Jan. 24, 2023, Docket No. 22-70001, for Publication)

 

U.S. Court of Appeals for the Fifth Circuit, Franlink Inc. v. Bace Services, Inc., Docket No. 21-20316

 

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)

 

U.S. Court of Appeals for the Federal Circuit, In Re McDonald, Docket No. 2021-1697

Patent

 

Reissue Statute

 

Recapture Rule

 

Equity

 

 

 

 

Appeal from the United States Patent and Trademark Office, Patent Trial and Appeal Board in No. 14/658,050

 

 

A.

The Reissue Statute and the Recapture Rule

 

 

Over a century ago, the Supreme Court recognized that a patentee may seek reissue of a patent if she erroneously claimed less than she had a right to claim in the original patent. See, e.g., Leggett v. Avery, 101 U.S. 256 (1879). Subsequently, the reissue statute was codified to delineate the circumstances where a patent may be reissued: when it “is, through error without any deceptive intention, deemed wholly or partly inoperative or invalid.” 35 U.S.C. § 251. Stemming from the reissue statute, the recapture rule provides that a reissue will not be granted to “recapture” claimed subject matter that was surrendered during prosecution to obtain the original claims. In the context of pre-AIA2 § 251, we have explained what errors can be appropriately corrected through reissue and what limitations are imposed by the recapture rule. See Greenliant Sys., Inc. v. Xicor LLC, 692 F.3d 1261, 1267 (Fed. Cir. 2012) (“A patentee may surrender a patent and seek reissue enlarging the scope of the original patent’s claims if through error without any deceptive intent he claimed less than he had a right to claim in the original patent and he applies for reissue within two years from the grant of the original patent.” (cleaned up)); Ball Corp. v. United States, 729 F.2d 1429, 1436 (Fed. Cir. 1984) (“The recapture rule bars the patentee from acquiring, through reissue, claims that are of the same or of broader scope than those claims that were canceled from the original application. On the other hand, the patentee is free to acquire, through reissue, claims that are narrower in scope than the canceled claims.” (emphasis in original)). We have further expounded upon the limits and the equitable underpinnings. The reissue statute is “based on fundamental principles of equity and fairness.” In re Weiler, 790 F.2d 1576, 1579 (Fed. Cir. 1986). Nonetheless, “the reissue statute was not enacted as a panacea for all patent prosecution problems, nor as a grant to the patentee of a second opportunity to prosecute de novo his original application.” Id. at 1582. Congress struck a balance between “the competing interest of providing a patentee with an opportunity to correct errors of inadequate claim scope with the public interest in finality and certainty of patent rights, and legislated in favor of allowing the patentee to correct its errors through broadening, if necessary.” In re Youman, 679 F.3d 1335, 1342 (Fed. Cir. 2012).

 

 

 

2 “AIA” refers to the Leahy-Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284 (2011).

 

 

In addressing pre-AIA § 251, we have explained that the statute provides the public with two safeguards against such broadening. First, “the public is on notice for two years following the issuance of a patent that the patent can be broadened to recapture matter ‘dedicated to the public’ through error.” Id. Analogously, “‘the recapture rule’ prevents a patentee from regaining through reissue subject matter surrendered during prosecution, thus ensuring the ability of the public to rely on a patent’s public record.”  Vectra Fitness, Inc. v. TNWK Corp., 162 F.3d 1379, 1384 (Fed. Cir. 1998). Second, reissue is limited to “instances where the patentee could demonstrate an ‘error without any deceptive intention.’” In  re Youman, 679 F.3d at 1342; see also MBO Lab’ys, Inc. v. Becton, Dickinson & Co., 602 F.3d 1306, 1314 (Fed. Cir. 2010) (“Without a rule against recapture, an unscrupulous attorney could feign error and re-draft claims in a reissue patent to cover a competing product, thereafter filing an infringement suit.”); Mentor Corp. v. Coloplast, Inc., 998 F.2d 992, 996 (Fed. Cir. 1993) (“Error under the reissue statute does not include a deliberate decision to surrender specific subject matter in order to overcome prior art, a decision which in light of subsequent developments in the marketplace might be regretted.”). The AIA amended § 251 to delete the phrase “without any deceptive intention” after “error” from the revised statute. See § 20(b)(1)(B), 125 Stat. at 333–34 (effective Sept. 16, 2012). Neither party argues that this change to the statute is material to our decision today.

 

 

The revised reissue statute provides: Whenever any patent is, through error, deemed wholly or partly inoperative or invalid, by reason of a defective specification or drawing, or by reason of the patentee claiming more or less than he had a right to claim in the patent, the Director shall, on the surrender of such patent and the payment of the fee required by law, reissue the patent for the invention disclosed in the original patent, and in accordance with a new and amended application, for the unexpired part of the term of the original patent. No new matter shall be introduced into the application for the reissue. 35 U.S.C. § 251(a).

 

 

Under the three-step recapture rule analysis, we consider: (1) whether and in what aspect the reissue claims are broader than the patent claims; (2) if broader, whether those broader aspects of the reissue claim relate to the surrendered subject matter; and (3) if so, whether the surrendered subject matter has crept into the reissue claim. In re Youman, 679 F.3d at 1343–45 (citing In re Mostafazadeh, 643 F.3d at 1360 (“The recapture rule is triggered only where the reissue claims are broader than the patented claims because the surrendered subject matter has been reclaimed in whole or substantial part (i.e., an added limitation has been eliminated or revised).”)).

 

 

 

(…) Accordingly, we affirm. The Board properly applied the recapture rule to bar Mr. McDonald’s attempt to reclaim claim scope already surrendered during prosecution. Because Mr. McDonald deliberately—not erroneously or inadvertently—added the “processor” limitations during prosecution of the original claims to overcome the § 101 rejection, the recapture rule does not permit him to now remove those limitations to broaden his claim.

 

 

The Board did not err in rejecting reissue claims 1– 7, 10, 12–14, and 29–38 of the ’111 patent as violating the recapture rule and all the reissue claims as being premised on a defective inventor reissue declaration.

 

 

 

 

 

(U.S. Court of Appeals for the Federal Circuit, In Re McDonald, August 10, 2022, Docket No. 2021-1697)

 

U.S. Court of Appeals for the Federal Circuit, In Re: John Bradley McDonald, Docket 21-1697

 

Patents (U.S.)

 

Procedure

 

 

Application for Reissue of an U.S. Patent

 

Reissue Application

 

Reissue Declaration

 

Recapture Rule

 

Continuation Application

 

Equity

 

 

 

 

Appeal from the United States Patent and Trademark Office, Patent Trial and Appeal Board in No. 14/658,050.

 

 

 

(…) While the application leading to the ’901 patent was pending, Mr. McDonald filed a continuation application, which ultimately issued as the ’111 patent. J.A. 44–72. The claims in the continuation application included “processor” limitations like those added to the parent application to overcome the § 101 patent eligibility rejection. J.A. 1636–43.

 

 

In 2015, Mr. McDonald filed a reissue application seeking to broaden the claims of the ’111 patent. J.A. 114, 128–29. Specifically, Mr. McDonald amended claim 1 of the ’111 patent as follows (…)

 

 

(…) Notably, the reissue application included amendments to remove the “processor” limitations that Mr. McDonald had previously added. J.A. 131–39, 331–39, 428–38.

 

 

(…) Mr. McDonald contends that the Board erred in rejecting reissue claims 1–7, 10, 12–14, and 29–38 under 35 U.S.C. § 251 as being an improper recapture of surrendered subject matter. Appellant’s Br. 15. He also contends that the Board erred by rejecting all the reissue claims as being based on an Inventor Reissue Declaration that was defective for failing to identify an error that is correctable through reissue. Id.

 

 

A.

The Reissue Statute and the Recapture Rule

 

Over a century ago, the Supreme Court recognized that a patentee may seek reissue of a patent if she erroneously claimed less than she had a right to claim in the original patent. See, e.g., Leggett v. Avery, 101 U.S. 256 (1879). Subsequently, the reissue statute was codified to delineate the circumstances where a patent may be reissued: when it “is, through error without any deceptive intention, deemed wholly or partly inoperative or invalid.” 35 U.S.C. § 251. Stemming from the reissue statute, the recapture rule provides that a reissue will not be granted to “recapture” claimed subject matter that was surrendered during prosecution to obtain the original claims. In the context of pre-AIA2 § 251, we have explained what errors can be appropriately corrected through reissue and what limitations are imposed by the recapture rule. See Greenliant Sys., Inc. v. Xicor LLC, 692 F.3d 1261, 1267 (Fed. Cir. 2012) (“A patentee may surrender a patent and seek reissue enlarging the scope of the original patent’s claims if through error without any deceptive intent he claimed less than he had a right to claim in the original patent and he applies for reissue within two years from the grant of the original patent.” (cleaned up)); Ball Corp. v. United States, 729 F.2d 1429, 1436 (Fed. Cir. 1984) (“The recapture rule bars the patentee from acquiring, through reissue, claims that are of the same or of broader scope than those claims that were canceled from the original application. On the other hand, the patentee is free to acquire, through reissue, claims that are narrower in scope than the canceled claims.” (emphasis in original)).

 

 

We have further expounded upon the limits and the equitable underpinnings. The reissue statute is “based on fundamental principles of equity and fairness.” In re Weiler, 790 F.2d 1576, 1579 (Fed. Cir. 1986). Nonetheless, “the reissue statute was not enacted as a panacea for all patent prosecution problems, nor as a grant to the patentee of a second opportunity to prosecute de novo his original application.” Id. at 1582. Congress struck a balance between “the competing interest of providing a patentee with an opportunity to correct errors of inadequate claim scope with the public interest in finality and certainty of patent rights, and legislated in favor of allowing the patentee to correct its errors through broadening, if necessary.” In re Youman, 679 F.3d 1335, 1342 (Fed. Cir. 2012).

 

 

In addressing pre-AIA § 251, we have explained that the statute provides the public with two safeguards against such broadening. First, “the public is on notice for two years following the issuance of a patent that the patent can be broadened to recapture matter ‘dedicated to the public’ through error.” Id. Analogously, “‘the recapture rule’ prevents a patentee from regaining through reissue subject matter surrendered during prosecution, thus ensuring the ability of the public to rely on a patent’s public record.” Vectra Fitness, Inc. v. TNWK Corp., 162 F.3d 1379, 1384 (Fed. Cir. 1998). Second, reissue is limited to “instances where the patentee could demonstrate an ‘error without any deceptive intention.’” In re Youman, 679 F.3d at 1342; see also MBO Lab’ys, Inc. v. Becton, Dickinson & Co., 602 F.3d 1306, 1314 (Fed. Cir. 2010) (“Without a rule against recapture, an unscrupulous attorney could feign error and re-draft claims in a reissue patent to cover a competing product, thereafter filing an infringement suit.”); Mentor Corp. v. Coloplast, Inc., 998 F.2d 992, 996 (Fed. Cir. 1993) (“Error under the reissue statute does not include a deliberate decision to surrender specific subject matter in order to overcome prior art, a decision which in light of subsequent developments in the marketplace might be regretted.”).

 

 

(…) See, e.g., Medtronic, Inc. v. Guidant Corp., 465 F.3d 1360, 1372–73 (Fed. Cir. 2006) (“The deliberate surrender of a claim to certain subject matter during the original prosecution of the application for a patent made in an effort to overcome a prior art rejection is not such ‘error’ as will allow the patentee to recapture that subject matter in a reissue.”

 

 

(…) MBO Lab’ys, 602 F.3d at 1316 (“The public’s reliance interest provides a justification for the recapture rule that is independent of the likelihood that the surrendered territory was already covered by prior art or otherwise unpatentable.”

 

 

(…) Accordingly, we affirm. The Board properly applied the recapture rule to bar Mr. McDonald’s attempt to reclaim claim scope already surrendered during prosecution. Because Mr. McDonald deliberately—not erroneously or inadvertently—added the “processor” limitations during prosecution of the original claims to overcome the § 101 rejection, the recapture rule does not permit him to now remove those limitations to broaden his claim.

 

 

B.

The Defective Inventor Reissue Declaration

 

Mr. McDonald also contends that the Board erred by rejecting the reissue claims as based on a defective inventor reissue declaration. A reissue declaration must “specifically identify at least one error pursuant to 35 U.S.C. § 251 being relied upon as the basis for reissue.” 37 C.F.R. § 1.175(a). The Board found that “the statement of error in the Reissue Declaration relates to an error that is uncorrectable by reissue.” McDonald, 2020 WL 2990970, at *12. We agree with the Board. The error pinpointed in the Inventor Reissue Declaration—the existence of the allegedly unnecessary “processor” limitations—is uncorrectable by reissue because doing so would violate the recapture rule. Mr. McDonald’s argument on the defectiveness of the declaration rises and falls with his argument on the violation of the recapture rule.

 

 

 

(U.S. Court of Appeals for the Federal Circuit, Aug. 10, 2022, In Re: John Bradley McDonald, Docket 21-1697)