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Forum selection clauses have been the focus of many decision highlighted on these pages over the last 18 years. But a pending appeal before the en banc U.S. Court of Appeals for the Ninth Circuit may have an outsized impact on Delaware litigation regarding this issue. In a case involving the Gap, Inc., the federal appellate court will decide whether a forum selection clause can be enforced to require claims to be filed in the Delaware Court of Chancery that would otherwise be filed in Federal Court.

A Reuters article by Alison Frankel describes the somewhat complex and nuanced issue as follows:

… to summarize ruthlessly, the key question is whether companies can avert Exchange Act derivative suits via forum selection provisions mandating litigation in Delaware Chancery Court, which does not have jurisdiction to hear Exchange Act claims – or whether the Exchange Act’s anti-waiver provision precludes enforcement of such forum selection clauses because they require shareholders to surrender a substantive right.

One indication of the importance of the issue is that several prominent former members of the Delaware Court of Chancery and Delaware Supreme Court, including three former Chancellors, have made a submission to the Ninth Circuit to support the enforceability of the forum selection clause at issue–taking a position that is contrary to a holding by the U.S. Court of Appeals for the Seventh Circuit involving Boeing.

The submission to the Ninth Circuit by the former members of the Delaware judiciary includes the following points regarding the forum selection clause at issue:

(1) the remedies available in this derivative action are duplicative of the remedies available in Delaware derivative actions; (2) the federal derivative claim at issue in this litigation is contingent on Delaware law both for its existence and for the definition of its critical metes and bounds; (3) where a stockholder claims that a false or misleading disclosure impaired the stockholder’s right to cast an informed vote, that claim is direct,  not derivative; (4) Delaware General Corporate Law Section 115 is irrelevant to the validity of the forum selection provision at issue in this litigation; and (5) the forum selection provision at issue in this litigation is enforceable under Delaware law.

This issue deserves a comprehensive analysis and commentary in the style of a law review article. Many others have published their views, and I expect that there will be no shortage of articles about this case available online. Stay tuned.

Supplement: About two hours or so after I posted the above commentary, I was regaled by an email from Prof. Mohsen Manesh, who along with Prof. Joseph Grundfest submitted an Amicus Curiae brief to the Ninth Circuit in the above-referenced case, that the former Delaware judiciary members, referenced above, agreed with in their submission to the Ninth Circuit.

The good professor informed me that he and Prof. Grundfest already authored a forthcoming article on this topic, which addresses both the federal and Delaware law issues, and it’s available at the following link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4274616

 

A recent Chancery decision is notable for the following quote:  “A party cannot act intentionally to create harm, then invoke equity in relief of that harm.  If that is not a traditional equitable maxim, it should be.”  Pentwater Capital Management LP v. Kaz, C.A. No. 2021-1087-SG, Slip op. at 14 (Del. Ch. April 8, 2022).

The introductory sentence to this opinion is also noteworthy: “The power of the common-law courts is largely limited to awards of damages. Not so with this court of equity which in addition to damages may use its equitable puissance to order litigants to refrain from, and even to take, actions.”  Slip op. at 1. The court in this case largely refused to enforce a forum selection clause due to delay and other procedural infelicities by the moving party.  (Use of the word “puissance” should be noted.)

Countless highlights of decisions and commentary have been provided on these pages regarding forum selection clauses.  Adding to that scholarship is a recent law review article, unrelated to this case, entitled: John F. Coyle, Contractually Valid Forum Selection Clauses, 108 Iowa Law Review (2022 Forthcoming).

 

 

 

A recent Delaware Court of Chancery decision must be read by anyone interested in the latest iteration of Delaware law concerning when a non-signatory may be bound by a forum selection clause in an agreement. In Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), the court provides the most thorough analysis of the titular topic that this reader is aware of, with scholarly insights and copious citations that explain the theoretical underpinnings that support a decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

The court granted an anti-suit injunction to prevent litigation from proceeding in Texas that was contrary to the forum selection clause to which the court found both a parent corporation and its wholly-owned subsidiary to be bound, based on the extensive reasoning provided in this opinion.

Issue Presented:

The issue presented in this decision was whether a non-signatory can be bound to a forum selection clause based on equitable estoppel or promissory estoppel. The court needed to determine whether the Flotek Sub was bound by the agreement signed by the Flotek Parent company before deciding if a particular issue was covered by the forum selection clause. The court conducted a claim-by-claim analysis to determine if the claims filed in another forum were covered by the forum selection clause at issue.

Key Facts:

The Flotek Parent in this case was a party to a Purchase Agreement with a Delaware forum selection clause. But the Flotek Subsidiary involved in this case was not a party to that agreement. Rather, the Flotek Sub was only a party to a separate Supply Agreement–that was referred to in the Purchase Agreement as an exhibit. The Purchase Agreement’s Delaware forum selection provision covered disputes related to other agreements such as the Supply Agreement. The supply agreement did not contain a forum selection provision.

Key Takeaways:

• It’s always useful to be reminded of the well-worn prerequisites for a preliminary injunction which the court provides at page 12.

• A reminder of basic Delaware contract interpretation principles is provided at pages 14-15.

• The court observes a truism of Delaware contract law that when more than one agreement is part of a unitary transaction, and when one contract is referred to in another, they are all interpreted as one contract. See Slip op. at 17-18. However, the court explained that this principle alone would not apply to require the claims of the Flotek Sub to be prosecuted in Delaware. See Slip op. at 32.

• The court restated a three-part test for determining when a non-signatory would be bound by a forum selection clause. See Slip op. at 33-48. The court modified the three-part test announced in the Chancery decision in Capital Group, 2004 WL 2521295, at *5. The first two parts of the test are as follows:

(i) the agreement contains a valid forum selection provision;

(ii) the non-signatory has a sufficiently close relationship to the agreement, either as an intended third-party beneficiary under the agreement or under principles of estoppel (such as equitable estoppel or promissory estoppel).

• The third element of the test described in the Capital Group case was the subject of extensive analysis and modification in this opinion.

• The court discussed the principles of estoppel that would bind a non-signatory to a forum selection clause: (i) a non-signatory accepted a direct benefit from the agreement; or (ii) a non-signatory had a close relationship to the agreement; a signatory to the agreement controlled the non-signatory; and the circumstances established that the signatory agreed to the forum selection provision on behalf of its controlled affiliate. Slip op. at 34. See also footnote 5. The court described the direct-benefit test as resting on principles of equitable estoppel, and the foreseeability test as introducing a measure of promissory estoppel. The court discussed at great length both the direct-benefit test and the foreseeability test. See Slip op. at 35-39.

• The third element in the Capital Group test, which the court modified, included the “same-agreement rule” that limited when a non-signatory would be bound, but that the Court of Chancery in this case decided not to follow.

• Among the extensive reasons given for not following that “same-agreement rule” in the third element of the Capital Group test are the following:

“That outcome [if the same-agreement rule applied] runs contrary to the underlying principles of estoppel that lead to the forum selection provision binding the non-signatory. When a non-signatory accepts a direct benefit under an agreement, principles of equitable estoppel demand that the non-signatory accept the burdens associated with that agreement, including a forum selection provision.”

Slip op. at 44.

• As applied to the facts of this case, the principles of estoppel called for enforcing the Delaware forum provision against the Flotek Sub. The Flotek Parent promised to litigate all claims arising out of or relating to the Supply Agreement in Delaware through the Delaware forum provision in the Purchase Agreement which encompassed related agreements among those claims that were within the forum selection provision. If the same-agreement rule were applied, it would permit the Flotek Parent to escape that promise.

• This decision interpreted the third element of the Capital Group test as asking whether the claims at issue fall within the plain language of a forum selection provision.

• This decision conducted a claim-by-claim analysis of the causes of action in a suit filed in Texas to determine whether they fell within the Delaware forum provision for purposes of an anti-suit injunction against the Flotek Parent. The court’s extensive reasoning explained why the Delaware forum selection provision also binds the Flotek Sub to the same degree as the Flotek Parent.

• The court’s holding also is based on the reasoning that it would allow parties to “enter into overarching forum selection provisions in a primary agreement without requiring that every controlled affiliate become a party to that agreement.”  The court further reasoned that the approach announced in this decision also promotes freedom of contract by enabling a controller to enter into an overarching forum selection provision and avoids the need for separate provisions in each agreement or the potentially cumbersome solution of having every controlled affiliate become a party to a primary agreement.

For the most recent iteration of Delaware law on the topic of forum non conveniens, as it has evolved over the last few years, careful readers should be aware of the recent Chancery decision in Sweeny v. RPD Holdings Group, LLC, C.A. No. 2020-0813-SG (Del. Ch. May 27, 2021). This decision is consistent with the latest developments in Delaware law regarding forum non conveniens, to the extent that “overwhelming hardship” need not be established by the defendant where, as in this matter, the plaintiff did not file suit first, and the cases in competing states are deemed to have been simultaneously filed. The shift towards a reduced importance of that “hardship criteria” developed after the Delaware Supreme Court’s 2014 opinion in the Martinez case, which was highlighted on these pages.

The opinion also features a reference to an unusual form of financing not essential to its conclusion, called the tontine, named after a 15th century Italian financier Lorenzo de Tonti.

One of the more quotable parts of this decision is that the court decided that it should not retain jurisdiction to apply New Jersey law because that would be “lane-hogging”, and that the court wanted to “stay in [its] lane.”

A recent decision by a Delaware Court of Chancery provides a useful reference for the prerequisites to obtain an injunction in Delaware to enjoin a party from pursuing claims in violation of an exclusive forum selection clause [in another jurisdiction]. In SPay, Inc. v. Stack Media Inc., C.A. No. 2020-0540-JRS (Del. Ch. March 23, 2021), the Delaware Court of Chancery described what one must establish before obtaining an anti-suit injunction based on a forum selection clause. See pages 5 and 6, and footnotes 11-15.

The court also described the elements for a claim of fraud in the inducement. See pages 9 and 10.

Also of note in this ruling is a basic principle of Delaware contract interpretation which requires a court to view a contract claim in the context of the whole relationship between the parties in order to “give sensible life” to the contract. See footnote 28 and related text.

Delaware will retain jurisdiction over a dissolution claim notwithstanding a mandatory New York forum selection clause, according to the recent Delaware Court of Chancery opinion in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021). This case involved the petition for dissolution of a Delaware LLC while litigation between the parties also was filed in New York. The LLC agreement had a deadlock provision but it was not effective for resolving the parties’ dispute. For example, there was no formula or deadline for a buyout.

Several important statements of Delaware law make this 45-page decision noteworthy (and blogworthy), as well as well-worth the time to read the whole opinion for those who need to know the latest iteration of Delaware law on the following topics:

  • Although Delaware courts generally enforce forum selection clauses, even when they require disputes to be litigated in a foreign forum–this is a notable exception: when a petition for dissolution of a Delaware LLC is filed pursuant to Section 18-802 of the Delaware LLC Act. See footnote 43. (The parties in this case agreed to the foregoing exception and the Court noted that they were correct in doing so.)
  • This opinion features a useful recitation of the factors the court will consider under Section 18-802 in order to determine if the statutory prerequisites for an LLC dissolution have been satisfied. See Slip op. at 24 to 27 and footnotes 119 to 128.

A recent blog post highlighted on these pages featured another Chancery decision addressing a deadlock in an LLC that formed the basis of a dissolution petition.

A recent Delaware Court of Chancery opinion interpreted related agreements that included forum selection clauses that were conflicting.  In Mack v. Rev Worldwide, Inc., C.A. No. 2019-0123-MTZ (Del. Ch. Dec. 30, 2020), the court addressed forum selection provisions in two related agreements which the court treated as one because they were incorporated by reference.

The court was asked to decide whether Delaware was the proper forum when one of the forum selection clauses required courts in Texas to address certain issues–and the other forum selection provision provided for a California court to hear disputes.

Key Takeaways:
● The court recited the well-established Delaware law about the enforceability of forum selection clauses generally.  Slip op. at 15 to 17.
● The court also addressed Rule 12(b)(3) motions challenging venue and whether arguments required to be made in an initial Rule 12 motion are waived if all the grounds for such motions are not explained, as well as the impact of a second motion under Rule 12 in connection with an amended complaint.  The court explained why those arguments would generally not be waived, even if all the grounds for such a motion were not recited in the original motion.
● The court also observed that in some instances non-signatories to a forum selection clause may also be bound by it.
● The court reasoned that unlike the typical situation where conflicting forum selection clauses choose Delaware and another forum, in this instance competing forum selection clauses both required litigation in states outside of Delaware. Therefore, the court determined that because neither of the parties chose Delaware, a court in one of the other two forums selected would need to decide which of them would address the merits of the case.

A recent Court of Chancery decision is almost as noteworthy for what it decided as for what was not decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the court carefully analyzes. Alas, for now, I’ll only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

    • The court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
    • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
    • The court compares DGCL section 220 with its counterpart in the California statutory regime.
    • The exclusive forum selection clause in the charter was addressed, and the court explained that but for this provision, the California court would be able to apply DGCL section 220.
    • Importantly, the court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
    • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.
    • By coincidence or otherwise, this decision was published the same week that a California court in another case refused to enforce a Delaware forum selection clause because the California court ruled that forcing a California resident to litigate in the Delaware Court of Chancery would deprive that resident of a constitutional right to a jury trial.
    • The foregoing hyperlink leads to an article in Delaware Business Court Insider of Aug. 7, 2020, that describes an apparent settlement to allow the case to proceed in Delaware Superior Court, a trial court of general jurisdiction with juries available. The counterpart suit in Delaware has its own procedural history. See William West v. Access Control Related Enterprises, LLC, et al., C.A. No. N17C-11-137-MMJ-CCLD, opinion (Del. Super. June 5, 2019).

Delaware law allows for non-signatories to be bound by a forum selection clause if a three-part test is met, and a recent Delaware Court of Chancery opinion provides an analysis of those factors while granting a motion to dismiss in Highway to Health, Inc. v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020).

The most noteworthy aspects of this pithy decision are: (i) a reminder that Delaware enforces forum selection clauses; and (ii) that a non-signatory can be bound by a forum selection clause if a three-part test is satisfied. See footnotes 46-47 and accompanying text. The directors of a Delaware company sought a declaratory judgment against non-residents of Delaware regarding a dispute about stock-appreciation-rights (SAR) that, by contract, required the board to fulfill fiduciary duties towards the SAR holders.

Three-Part Test for Binding Non-signatories

The three-part test requires one to demonstrate that: (i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement. Slip op. at 15. The third element of the test was not satisfied based on the facts of this case because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.

Long-Arm Statute and Specific Personal Jurisdiction

This decision also features an analysis of the Delaware long-arm statute, and explains why the “specific jurisdiction” requirements under Section 3104(c)(1) of Title 10 of the Delaware Code were not satisfied because there was no relevant act that actually occurred in Delaware. The Court factually distinguished a case that found specific jurisdiction based on an amalgamation of factors that included: Delaware lawyers drafting the agreement at issue; a Delaware choice-of-law provision; and issues related to the sale of capital stock in a Delaware company. See NRG Barriers, Inc. v. Jelin, 1996 WL 377014 (Del. Ch. July 1, 1996).

Although the plaintiffs in this case did not avail themselves of the opportunity, the Court observed that limited discovery may be allowed in connection with the plaintiff satisfying its burden of proof to establish personal jurisdiction over defendants.

A recent Delaware Court of Chancery decision entertained a request for expedited relief in Delaware despite a New York forum selection clause, in part due to the unavailability of the New York Courts that were not fully operational due to the coronavirus shutdown. Francis Pileggi and Chauna Abner co-authored an article with an overview of the ruling in Conduent Business Services v. Skyview Capital, C.A. No. 2020-0232-JTL, Transcript Ruling at **33-34 (Del. Ch. Mar. 30, 2020), for the Delaware Business Court Insider in its recent edition. The full article appears below.

“While New York Court System is ‘Unavailable’ Delaware Court of Chancery Permits Parties to Seek Relief in Delaware Despite a New York Forum Selection Clause”

by: Francis G.X. Pileggi and Chauna A. Abner

Amidst the COVID-19 pandemic, the Delaware Court of Chancery recently held that despite a forum selection clause designating New York as the appropriate venue to litigate disputes arising under an agreement, the parties could seek relief in the Court of Chancery because New York courts were unavailable.  Conduent Bus. Servs., LLC v. Skyview Capital, LLC, C.A. No. 2020-0232-JTL, Transcript Ruling, at **33-34 (Del. Ch. Mar. 30, 2020).

In Conduent Business Services, the complaint asserted an anticipatory breach of an asset purchase agreement and sought a declaratory judgment interpreting the terms of the agreement. Id. at 10. That agreement had a forum selection clause designating New York as the forum to litigate disputes arising from the contract. Id. at *19. Before the Court was plaintiff’s motion for expedited proceedings.

The defendant argued that plaintiff’s claim for relief was not colorable because venue was not appropriate. Id. at *20. The defendant contended that the applicable law under the contract is New York law, and the Court should not impose “an exception to what remains New York law for which the parties bargained.” Id. at *18. The defendant argued that “part of the corpus of New York law right now is how the New York courts are handling commercial cases. And that includes, as both sides have briefed, that right now they are not handling this.” Id. at **17-18. Finally, the defendant noted that the New York courts provided for emergency applications and the plaintiff did not make that application. Id. at **18-19.

In response, the plaintiff urged that it was not “trying to stomp on the venue clause” and that it was “just trying to make sure that [it] can protect [it]sel[f] from irreparable harm while the New York courts are closed.” Id. at *32.

In ruling on whether venue was appropriate, Vice Chancellor Laster stated: “frankly, I think the fact that the New York Court is unavailable is pretty dispositive.” Id. *10. He explained that there is no dispute that “under normal circumstances, the forum selection clause in New York would be binding.” Id. at *33. Thus, he phrased the issue as “whether the circumstances, where New York — for understandable reasons given, the current crisis that the city is facing — has decided not to accept expedited commercial matters constitutes a situation that allows the parties to resort to other tribunals that are potentially capable of granting emergent or expedited relief.” Id.

In holding that venue was proper in the Court of Chancery to resolve the motion to expedite, the Court reasoned that “case law holds that where a forum selection clause specifies a forum that is unavailable, parties can resort to a different forum, where appropriate jurisdiction exists” and that case law applies here. Id. The Court explained that this ruling was not intended to disrespect the courts of New York, but it acknowledges that “[t]he reality is that [New York courts] face an extraordinary situation right now, and so it’s understandable that they’d be in a position where they can’t handle disputes.” Id. at **33-34.

Given the uncertain times that the COVID-19 pandemic has resulted in, including the unknown long-term effects, if any, that it will have on courts throughout the country, the Court’s ruling that “people can go to other courts, if the jurisdictional bases are met, and seek relief in those courts” is of paramount importance. Id. at *34. Although this is a transcript ruling, in Delaware, parties may cite transcript rulings in briefs as authority.