Commercial Litigation and Arbitration

Forum Selection Clause (FSC) Analyzed Like Arbitration Clause — Broad FSC Covers Tort Claims Arising out of Deal — 6 Theories for Binding Non-Parties to FSC — Unclear Whether State or Federal Law Determines Who Is Bound

Harland Clarke Holdings Corp. v. Milken, 2014 U.S. Dist. LEXIS 13947 (W.D. Tex Feb. 4, 2014):

Scantron and Digital entered into a "Securities Purchase Agreement between Scantron Corporation and KUE Digital International, LLC" (the "Purchase Agreement") dated December 15, 2010 [for the purchase of the GlobalScholar business]. The Purchase Agreement contains the following choice-of-law  and forum-selection clause:

   §11.10 Governing Law; Consent to Jurisdiction. All matters relating to this Agreement or the breach, interpretation, construction, validity, termination and enforcement of this Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of Laws of any jurisdiction other than the State of Delaware. Subject to Sections 1.04, 1.05, 6.02 and 11.11 herein, and the alternative dispute resolution provisions contained therein, each of the Parties hereby irrevocably and unconditionally submits, for itself and its assets and properties, to the exclusive jurisdiction of any Delaware State court in New Castle County, or Federal court of the United States of America, sitting within New Castle County in the State of Delaware, and any respective appellate court, in any action or proceeding arising out of or relating to this Agreement, the agreements delivered in connection with this Agreement, or the transactions contemplated hereby or thereby, or for recognition  [*6] or enforcement of any judgment relating thereto, and each of the Parties hereby irrevocably and unconditionally (i) agrees not to commence any such action or proceeding except in such courts; (ii) agrees that any claim in respect of any such action or proceeding may be heard and determined in such Delaware State court or, to the extent permitted by applicable Law, in such Federal court; (iii) waives to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such Delaware State or Federal court; and (iv) waives, to the fullest extent permitted by applicable Law, the defense of lack of personal jurisdiction or an inconvenient forum to the maintenance of such action or proceeding in any such Delaware State or Federal court. . . .


Footnote 9   The parties and the courts tend to analyze arbitration and forum-selection clauses similarly. As noted by one district court:

   Both the United States Supreme Court and the Fifth Circuit have noted the similarities between arbitration clauses and forum selection clauses and have applied the same enforceability analysis to both because an arbitration clause is, "in effect, a specialized kind of forum-selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute." Scherk v. Alberto-Culver Co., 417 U.S. 506, 519, 94 S.Ct. 2449, 2457, 41 L.Ed.2d 270 (1974); Haynsworth, 121 F.3d at 963 (rejecting the distinction between arbitration clauses and forum selection clauses for purposes of analyzing the enforceability of a forum selection clause).

Smith v. Lucent Technologies, Inc., No. 02-0481, 2004 U.S. Dist. LEXIS 4074, 2004 WL 515769 (E.D. La. Mar. 16, 2004). Therefore, courts have treated cases interpreting and applying arbitration clause as generally applicable in cases involving forum-selection clauses.

Plaintiffs assert claims for violations of the Texas Securities Act, statutory fraud, common-law fraud, nondisclosure fraud, and negligent misrepresentation.  The basis for all of Plaintiffs' claims is alleged misrepresentations that induced Plaintiffs to enter into the Purchase Agreement and related transactions to facilitate the sale of GlobalScholar to Plaintiffs. These claims arise out of and are related to the Purchase Agreement, the Guarantee, and the transactions contemplated thereby (i.e., the purchase of GlobalScholar) and thus fall within the scope of the mandatory forum-selection clause. Thus, under federal, Texas, and Delaware law, although Plaintiffs are not suing for breach of contract or complaining about Raman's performance under the Guarantee, the clauses are broad enough to encompass all of their claims. See Personal Sec., 297 F.3d at 391 (when arbitration agreement covers all disputes related to the agreement, it covers allegations of fraudulent misrepresentations made during negotiations leading up to the agreement); ASDC Holdings, LLC v. Richard J. Malouf 2008 All Smiles Grantor, No. 6562-VCP, 2011 Del. Ch. LEXIS 129, 2011 WL 4552508 (Del. Ch. Sept. 14, 2011) ("Broad forum selection clauses, on the other hand, which expressly cover, for example, all claims between the contracting parties that 'arise out of' or 'relate to' a contract, apply not only to claims dealing directly with the terms of the contract itself, but also to 'any issues that touch on contract rights or contract performance.'"); In re Harris Corp., No. 03-13-00192-CV, 2013 Tex. App. LEXIS 6769, 2013 WL 2631700, at *4 (Tex. App.--Austin June 4, 2013) (concluding that broad forum-selection clause covered non-contractual claims such as fraud, fraudulent inducement, and negligent misrepresentation, and listing cases holding the same).10

Footnote 10   Defendants assert that Delaware law governs interpretation of the forum-selection clause given the choice-of-law provision in the Purchase Agreement. However, Texas, Delaware, and federal law are consistent and each holds that a broad clause like the one in this case would cover Plaintiffs' claims.

In addition, although Plaintiffs assert fraud claims, they have not alleged that the forum-selection clause itself was a product of fraud. Therefore, under Delaware, Texas, and federal law, Plaintiffs' fraud claims do not invalidate application of the forum-selection clauses in the agreements. Carlyle Inv. Mgmt. L.L.C. v. Nat'l Industries Group, No. 5527-CS, 2012 Del. Ch. LEXIS 238, 2012 WL 4847089 (Del. Ch. Oct. 11, 2012) ("Under Delaware and federal law, a party cannot escape a valid forum selection clause, or its analogue, an arbitration clause, by arguing that the underlying contract was fraudulently induced or invalid for some reason unrelated to the forum selection or arbitration clause itself. Instead, the party must show that the forum selection clause itself is invalid.") (citing Scherk v. Alberto-Culver, 417 U.S. 506, 519 n.14, 94 S. Ct. 2449, 41 L. Ed. 2d 270 (1974) ("[A]n arbitration or forum-selection clause in a contract is not enforceable if the inclusion of that clause in the contract was the product of fraud or coercion.")); MaxEn Capital LLC v. Sutherland, No. H-08-3590, 2009 U.S. Dist. LEXIS 29308, 2009 WL 936895, at * 7 (S.D. Tex. April 3, 2009) ("the proper inquiry is whether the forum-selection clause is the result of fraud in the inducement of the forum-selection clause itself") (citing Afram Carriers, Inc. v. Moeykens, 145 F.3d 298, 302 n.3 (5th Cir. 1998)); In re Harris Corp., 2013 Tex. App. LEXIS 6769, 2013 WL 2631700, at *5 (under Texas law, a party seeking to avoid enforcement of a forum-selection clause based on fraud must show that the forum-selection clause itself was procured through fraud or overreaching).

3. Harland Clarke is bound by the forum-selection clause under background principles of contract law.

Harland Clarke contends that its claims, which may only be brought under and in accordance with the Purchase Agreement or Guarantee, are nevertheless not subject to the forum-selection clauses because those only apply to the Parties to the various agreements, and Harland Clarke is not a signatory party to any agreement with a forum-selection clause. In response, Defendants assert various theories under which Harland Clarke is bound by the forum-selection clause even though it is a non-signatory.

a. What law governs who is bound by the forum-selection clause?

The parties dispute the issue of what law governs who is bound by the forum-selection clause. It is somewhat uncertain whether federal or state law governs this issue. Plaintiffs contend that the issue is governed by state law, specifically Texas law. Defendants argue that the issue is governed by federal law, and that even if state law controls, it would be Delaware law since that is the substantive law chosen by the parties in the agreements.

In Washington Mutual Finance Grp. LLC v. Bailey, 364 F.3d 260 (5th Cir. 2004), the Fifth Circuit recognized that, in determining whether parties agreed to arbitrate a certain matter, courts apply the contract law of the particular state that governs the agreement. Id. at 264. However, it also noted that it "is often an uncertain question" whether state or federal law governs the determination whether a party should be compelled to arbitrate its claims. Id. at 267 n.6. It found that "nearly all federal circuit courts faced with the specific question . . . — namely, to what extent a non-signatory is bound by an arbitration provision contained in a contract she is suing under — have applied the federal substantive law of arbitrability to resolve the issue." Id. Despite noting that the court in Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1075-75 (5th Cir. 2002) had applied Texas law to determine whether a particular non-signatory was bound by an arbitration agreement, the Bailey court agreed with this trend and found "it appropriate to apply the doctrine of equitable estoppel as outlined by federal courts without reference" to state law. Id.

Plaintiffs argue that the Supreme Court's decision in Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 129 S. Ct. 1896, 173 L. Ed. 2d 832 (2009) requires courts to apply state law to the issue of who is bound by an arbitration agreement (and by extension a forum-selection clause). In Carlisle, the Supreme Court clarified that while the FAA creates substantive federal law regarding the enforceability of arbitration agreements, "background principles of state contract law" control the interpretation of the scope of such agreements, "including the question of who is bound by them." 556 U.S. at 630. The Supreme Court then explained that "'traditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through 'assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel.'" Id. In Todd v. Steamship Mutual Underwriting Association (Bermuda) Ltd., 601 F.3d 329, 336 (5th Cir. 2010), the Fifth Circuit discussed Carlisle and noted that, "In Carlisle, the Supreme Court made clear that state law controls whether an arbitration clause can apply to nonsignatories."

Since Carlisle and Todd, some district courts have applied state law to the question of who is bound by an arbitration clause. See Galitski v. Samsung Telecommunications Am., LLC, No. 3:12-CV-4782-D, 2013 U.S. Dist. LEXIS 171908, 2013 WL 6330645, at *3 & n.8 (N.D. Tex. Dec. 5, 2013); Evans v. TIN, Inc., No. 11-2067, 2012 U.S. Dist. LEXIS 89180, 2012 WL 2343162, at *4 (E.D. La. June 20, 2012) ("Because the FAA does not 'purport [ ] to alter background principles of state contract law regarding the scope of agreements,' courts must look to state law to determine which contracts are enforceable against third parties."); Beach v. Green Tree Servicing, LLC, No. H-08-cv-2358, 2009 U.S. Dist. LEXIS 51451, 2009 WL 1759595, at *3 (S.D. Tex. June 17, 2009). Some courts, however, have continued to find the question unsettled. See Graves v. BP America, Inc., 568 F.3d 221, 223 (5th Cir. 2009) (decided two days after Carlisle and finding it unnecessary to decide whether federal or state law applies because "federal and state law dovetail to provide the same outcome"); see also Lemus v. CMH Homes, Inc., 798 F. Supp. 2d 853, 859 (S.D. Tex. 2011) (applying federal and Texas law without specifying which controlled). And others have continued to apply federal law to the question of who is bound without discussing Carlisle. See, e.g., Griffin v. ABN Amro Mortg. Group, Inc., 378 F. App'x 437, 439-40 (5th Cir. 2010) (applying federal law of equitable estoppel).

Generally whether state or federal law applies will have no effect on the outcome, since state and federal law both utilize background principles of contract and agency law, and those principles are typically similar across jurisdictions. "[F]ederal courts have held that so long as there is some written agreement to arbitrate, a third party may be bound to submit to arbitration. Ordinary principles of contract and agency law may be called upon to bind a nonsignatory to an agreement whose terms have not clearly done so. Six theories for binding a nonsignatory to an arbitration agreement have been recognized: (a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing/alter ego; (e) estoppel; and (f) third-party beneficiary." Hellenic Investment Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517 (5th Cir. 2006) (quoting Bridas S.A.P.I.C. v. Gov't of Turkmenistan, 345 F.3d 347, 355-56 (5th Cir. 2003)). These same theories were listed by the Supreme Court in Carlisle as background principles of state law. The Court concludes that there is no significant difference among Delaware, Texas, and federal law in this case, and thus it need not decide which law controls.


Share this article:


Recent Posts