California forum selection clauses in preliminary agreements for the acquisition of an eyewear company bound a non-signatory buyer that stepped in and purchased the target before the original deal could be closed, a U.S. District Court judge in Massachusetts has decided.
The plaintiff, Europa Eye Wear Corp., filed a declaratory judgment action in Massachusetts federal court to prevent its acquisition of AO Eyewear from being set aside by defendant Kaizen Advisors, which had signed a letter of intent to buy AO Eyewear but failed to close the deal.
“This case shows, number one, that you have to use the right language to make [the forum selection clause] mandatory, and two, you want to make it broad enough to cover all claims.”
— Michael F. Zullas, Boston
The defendant argued that California forum selection clauses in both its letter of intent and non-disclosure/non-circumvention agreement with AO Eyewear bound the plaintiff, even though the plaintiff was not a party to those agreements.
Judge Timothy S. Hillman agreed, granting the defendant’s motions to dismiss and transfer venue.
“The Court recognizes the significant due process considerations implicated where forum-selection clauses are applied to a non-signatory,” Hillman wrote. “In this case, however, … Europa is the plaintiff seeking declaratory judgment not a defendant being haled into a forum with which it has no contacts. Accordingly, like all other plaintiffs, if it wishes to proceed with its claims, it must do so in the proper forum.”
The seven-page decision is Europa Eye Wear Corp. v. Kaizen Advisors, Inc., et al.
Defense attorney John J. Tumilty of Waltham, Massachusetts, said Hillman’s ruling is in line with existing precedent and demonstrates that non-parties to a contract can be subject to a forum selection clause if the action they are involved in is closely related to the underlying deal.
“It was clear that the true actions that were filed here arose out of the same set of underlying facts and out of the two contracts, both of which contained forum selection clauses requiring the actions be filed in California,” Tumilty said.
Boston business litigator Michael F. Connolly said he thought Hillman reached the correct result given that the plaintiff’s claims were virtually “subsumed” within the defendant’s dispute with AO Eyewear.
“Europa wanted a declaratory judgment that it did nothing wrong,” Connolly said.
He pointed out that a related lawsuit in California would examine the communications between Europa and AO Eyewear to determine whether Europa in fact interfered with the defendant’s business relations.
“[Those issues] are really part and parcel of the same dispute,” Connolly said.
Connolly added that if the plaintiff did interfere with the contracts between Kaisen and AO, then it would be a fair assumption that there would be sufficient contacts with California for the exercise of personal jurisdiction over the plaintiff.
Boston business law attorney Michael F. Zullas said the case demonstrates the importance of exercising care in the drafting of forum selection clauses to ensure their enforceability.
“This case shows, number one, that you have to use the right language to make [the forum selection clause] mandatory and, two, you want to make it broad enough to cover all claims,” Zullas said.
Andrew F. Caplan of West Roxbury represented consolidated plaintiff Alan McKinley, the president of AO Eyewear, and AO Eyewear as cross-claimant in the case. He declined to comment.
Plaintiff Europa Eye Wear was represented by Shepard Davidson of Boston.
Planned acquisition terminated
The defendant conducted due diligence and entered into negotiations for the acquisition of AO Eyewear in early 2017. To further negotiations, the defendant and AO Eyewear executed a letter of intent as well as a non-disclosure/non-circumvention agreement.
Both contracts included California forum selection clauses. Specifically, the non-disclosure agreement provided that the “parties agree and accept that any legal action or proceeding brought with respect to this Agreement shall be brought in the State of California or the United States District Court for the Central District of California, Los Angeles, California.”
Likewise, the letter of intent stated “[a]ny dispute shall be resolved exclusively in the State or Federal courts located in Los Angeles, California.”
AO Eyewear terminated the planned acquisition before the defendant could close the deal. Instead, AO Eyewear entered into a binding letter of intent to sell its assets to the plaintiff.
Seeking to head off a legal challenge by the defendant, the plaintiff filed an action in Massachusetts federal court seeking a declaratory judgment barring the defendant from enjoining the impending acquisition as well as a declaratory judgment that the president of AO Eyewear, Alan McKinley, had no liability to the defendant for fraud.
The defendant subsequently filed a suit in California state court against both the plaintiff and AO Eyewear, asserting various claims including breach of both the non-disclosure agreement and letter of intent, negligent and intentional interference with contractual relations, and fraudulent concealment. The plaintiff subsequently removed the state court action to the U.S. District Court for the Central District of California.
In the Massachusetts case, the defendant sought the enforcement of the forum selection clauses in its contracts with AO Eyewear, moving to dismiss or, in the alternative, transfer.
The U.S. Supreme Court in its 2013 decision in Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas recognized that a forum selection clause may be enforced by a motion to transfer under 28 U.S.C. §1404(a). The Supreme Court held that in such cases “a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.”
Guided by Atlantic Marine, Hillman addressed the threshold question of whether the forum selection clauses at issue were permissive or mandatory. The judge found the clauses mandatory given the parties’ use of the word “shall” in operative language.
Hillman next found that the scope of the clauses encompassed the plaintiff as a non-signatory. The judge noted that federal judges in Massachusetts have concluded in other cases that a non-party to a forum selection clause may be bound if it is “closely related to the dispute such that it becomes foreseeable that it will be bound.”
On that issue, he found instructive a 2009 decision by the 1st U.S. Circuit Court of Appeals, Rivera v. Centro Medico de Turabo, Inc.
Rivera involved a patient who signed a medical procedure consent form that contained a forum selection clause. The patient and his wife sued the hospital following complications from the surgery. The patient’s wife was a non-signatory to the forum selection clause.
The 1st Circuit concluded that both the patient and the wife, who sued for emotional distress, were bound by the forum selection clause because “‘claims involving the same operative facts’ as a claim for breach of contract that is subject to a forum selection clause should also be litigated in the forum chosen by the parties.”
The court reasoned that, as a matter of judicial economy, finding the derivative claims within the scope of the forum selection clause was “the only sensible outcome when the relative cause of action is not only related to, but dependent upon, the subject cause of action.”
Hillman found Rivera dispositive in the matter before him.
“Whether [the defendant] is entitled to delay or prevent the sale of AO … necessarily requires an interpretation of the contracts between [the defendant] and AO,” the judge wrote. “Therefore, … the disputes between [the defendant] and AO and between [the defendant] and Europa are based on the same set of operative facts such that this case warrants transfer.”
The plaintiff argued that it should not be bound by a California forum selection clause because it is not subject to personal jurisdiction in California.
Hillman found that contention unavailing.
“It is true that several of the cases enforcing forum-selection clauses against non-signatories noted above involve motions to dismiss for improper venue, not for want of personal jurisdiction,” Hillman wrote. “This distinction is not without a difference. ‘While objections to both personal jurisdiction and venue may be waived, venue is primarily a matter of choosing a convenient forum and implicates no constitutional principle, while due process considerations are present in all personal jurisdiction inquiries.’”
The judge concluded by noting that if the plaintiff objected to the forum selection clause on jurisdictional grounds, “the California Action (where Europa is a defendant) is the appropriate court to adjudicate those claims upon a more fully developed record than presented to this Court.”