Firexo, Inc. v. Firexo Grp. Ltd.

99 F.4th 304

FIREXO, INC., Plaintiff-Appellant, v. FIREXO GROUP LIMITED, Defendant-Appellee.

No. 23-3085

United States Court of Appeals, Sixth Circuit

Argued: October 18, 2023

Decided and Filed: April 12, 2024

Appeal from the United States District Court for the Northern District of Ohio at Toledo. No. 3:21-cv-02336—Jack Zouhary, District Judge.

ARGUED: Paul Belazis, MALONE, AULT & FARELL, Toledo, Ohio, for Appellant. Jason J. Blake, CALFEE, HALTER & GRISWOLD, LLP, Columbus, Ohio, for Appellee. ON BRIEF: Paul Belazis, MALONE, AULT & FARELL, Toledo, Ohio, for Appellant. Jason J. Blake, John F. Fisher, CALFEE, HALTER & GRISWOLD, LLP, Columbus, Ohio, for Appellee.

Before: BATCHELDER, GRIFFIN, and LARSEN, Circuit Judges.

BATCHELDER, J., announced the judgment, in which LARSEN, J., joined, and delivered the lead opinion in which LARSEN, J., joined in part. LARSEN, J. (pp. 330-32), delivered a separate opinion concurring in part and in the judgment. GRIFFIN, J. (pp. 332-36), delivered a separate dissenting opinion.

OPINION

ALICE M. BATCHELDER, Circuit Judge.

A corporate defendant in a civil lawsuit moved to dismiss the plaintiff's action based on a contractual forum-selection clause even though the plaintiff was not a signatory to that contract. The district court applied the so-called "closely related" doctrine, found that the plaintiff was sufficiently closely related to the contract for the court to apply and enforce the forum-selection clause against that non-signatory plaintiff, and dismissed the action. The plaintiff appeals, arguing that the district court applied the wrong law, and correspondingly the wrong analytical approach, to determine the contract's applicability. Ultimately, we agree and for the reasons that follow, we REVERSE and REMAND.

I. FACTS

Firexo Group Limited ("FGL") is a British company that makes fire extinguishers. In 2019, FGL partnered with Scot Smith (of Port Clinton, Ohio) to sell its fire extinguishers in the United States. FGL and Smith entered a contract titled "Shareholder Agreement" (though it is referred to therein, by the district court, and hereinafter as the "Joint Venture Agreement" or "JVA"), through which Smith purchased from FGL 70% of its wholly owned subsidiary, Firexo Corporation, already incorporated in Florida. Firexo was not a signatory to the JVA.

The JVA has a forum-selection clause designating England or Wales as the "exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this agreement or its subject matter or formation." This language appears very broad: i.e., "any dispute . . . in connection with." For perspective, consider "two categories of terms describing the scope of a forum selection clause. The narrower category includes terms such as 'arise out of,' 'arise from,' or 'arising under,' whereas the broader category includes terms such as 'in connection with,' 'relating to,' or 'associated with.' " Prod. Res. Grp., L.L.C. v. Martin Pro., A/S, 907 F. Supp. 2d 401, 412 (S.D.N.Y. 2012) (citing Phillips v. Audio Active Ltd., 494 F.3d 378, 389 (2d Cir. 2007)).

In 2021, based on its ongoing and worsening problems with FGL's fire extinguishers, Firexo sued FGL in an Ohio court. In its complaint, Firexo claimed breach of contract based on an oral "sole distributorship agreement," breach of the duty of good faith, breach of the warranties of fitness and merchantability, misrepresentation, and fraud in the inducement. The complaint did not name Smith as a plaintiff, nor did it reference the JVA or the Uniform Commercial Code. FGL removed the case to federal court based on diversity and then, relying on the JVA's forum selection of England or Wales, moved to dismiss. The district court granted the motion. Firexo, Inc. v. Firexo Grp. Ltd., No. 3:21-cv-2336, 2023 WL 2772388 (N.D. Ohio Jan. 26, 2023).

The determinative question was, and is, whether plaintiff Firexo, which is essentially the product of FGL's and Smith's joint venture, is bound by the terms of the JVA even though it is not a party (signatory) to the JVA. Certain provisions of the JVA are relevant to this dispute:

Overview:

A. [FGL] and [Smith] have agreed to form and jointly own a new company, the Joint Venture Company (the 'JVC' [i.e., Firexo]);

B. [Firexo] will carry on business in accordance with the terms and conditions of this agreement; and,

C. [FGL] and [Smith] will exercise their rights in relation to [Firexo] in accordance with the terms and conditions of this Agreement

Purpose:

2.1 The Business of [Firexo] is the sale and distribution of [FGL]'s fire extinguishing products within the [United States].

Investment:

6.1 [Smith] shall invest one million seven hundred thousand British pounds sterling (£1,700,000.00) in consideration for seventy (70) shares [i.e., 70% ownership] of [Firexo].

Parties' Relationship per the JVA:

26.1 All transactions entered into between either party and [Firexo] shall be conducted in good faith and on the basis set out or referred to in this agreement or, if not provided for in this agreement, as may be agreed by the parties and, in the absence of such agreement, on an arm's length basis.

Third-Party Rights:

30.1 This agreement is made for the benefit of the parties and their successors and permitted assigns and is not intended to benefit, or be enforceable by, anyone else.

Choice of Law:

33.1 This agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation shall be governed by and construed in accordance with the laws of England and Wales.

Forum-Selection Clause:

33.2 Each party irrevocably agrees that the courts of England and Wales shall have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this agreement or its subject matter or formation.

Three things about this contract bear recognition or brief discussion. One, the crux of the JVA is that FGL sold 70% of Firexo to Smith for £1,700,000, ergo offer, acceptance, and consideration. But if Firexo received some benefit from the JVA, other than Smith's new partial ownership, that benefit is not evident. That is, if Firexo had been a signatory party to the JVA and agreed to be bound by its provisions, it is not evident what consideration Firexo would have received for doing so. Two, because FGL owned Firexo and sold 70% of it to Smith, if Firexo had been a signatory party to the JVA, it is not clear here whether Firexo would have contracted with FGL or with Smith. And three, while the JVA sets out Smith's and FGL's mutual agreement to engage in a certain business, namely the sale and distribution of FGL's fire extinguishers in the United States, the JVA does not specify any terms, such as price, quantity, quality, or duration. According to Firexo, the subsequent oral "sole distribution agreement" established those terms.

The district court determined that even though Firexo was not a signatory to the JVA, the JVA's forum-selection clause applied because Firexo and its claims were so "closely related" to the JVA that it was "foreseeable" that the clause would apply. Firexo, 2023 WL 2772388, at *1. That is, even though the JVA contained no terms governing Firexo's and FGL's business relationship, it was necessarily foreseeable to Firexo that any lawsuit arising out of or related to its business with FGL (i.e., the distribution of FGL's fire extinguishers) had to be filed in a court in England or Wales, and decided pursuant to English law. To support this determination, the district court adopted the Fifth Circuit's somewhat novel four-factor test for "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.

Id. at *2 (quoting Franlink Inc. v. BACE Servs., Inc., 50 F.4th 432, 442 (5th Cir. 2022)). The district court then found those factors were satisfied based on several articulated facts, including:

• The JVA specified [that] the purpose of Firexo would be the 'sale and distribution of FGL's fire extinguishing products within the United States.'

• Smith agreed in the JVA to carry out Firexo's business in accordance with the terms of the JVA.

• Smith agreed to exercise his rights relating to Firexo consistent with the terms of the JVA.

• Smith and FGL are the original and only investors in Firexo.[¹]

• Smith is the majority shareholder and Executive Officer of Firexo and is directing this lawsuit.

Id. (editorial marks omitted). The district court held that "[b]ecause Firexo is so 'closely related' to the dispute between Smith and FGL, it was 'foreseeable' that it w[ould] be bound by the JVA's forum-selection clause," id. at *3, and dismissed the case for lack of jurisdiction.

II. BACKGROUND LAW

A. Forum Selection Clauses—Existence, Enforceability, Applicability, and Effect

Existence. The parties to a contract may agree to litigate any or all potential future disputes in a particular forum via a "forum-selection clause." See Southland Corp. v. Keating, 465 U.S. 1, 7, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972) ("Forum-selection clauses . . . are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be 'unreasonable' under the circumstances."). This is often a bargained-for provision.² Id. at 16, 92 S.Ct. 1907 ("It is equally possible that the contract price took this [forum-selection clause] into account.").

Enforceability. In the Sixth Circuit, "[f]ederal law governs the enforceability of a forum-selection clause in a diversity suit." Boling v. Prospect Funding Holdings, LLC, 771 F. App'x 562, 568 (6th Cir. 2019) (citing Wong v. PartyGaming Ltd., 589 F.3d 821, 828 (6th Cir. 2009)). "The party opposing the forum selection clause bears the burden of showing that the clause should not be enforced." Wong, 589 F.3d at 828 ...