Thursday, August 30, 2018

Charles A. Peterson v. Evapco, Inc. (Ct. of Special Appeals)

Filed: July 5, 2018

Opinion by: Andrea M. Leahy

Holding: Pursuant to the “closely-related” doctrine adopted from other federal and state jurisdictions, a forum-selection clause in a Confidentiality Agreement may be used to assert personal jurisdiction over non-resident, non-signatories where the clause itself was valid; the claims arose out of the non-signatories’ status in relation to the Agreement; and the non-signatories were so closely related to the contract such that it was foreseeable for them to be haled into the forum court.

Facts: Appellees purchased a North Carolina cooling tower products company (the “Company”) from two spouses who are non-residents of Maryland (“Appellant Husband” and “Appellant Wife,” respectively). As part of the stock purchase agreement, Appellant Husband signed a Confidentiality Agreement that contained a non-compete clause and a forum-selection clause designating Maryland. Appellant Husband remained an employee of the Company until his termination for the conduct that forms the basis of the underlying lawsuit.

Appellees claimed that Appellant Husband had, individually and through two companies (the “Appellant Companies”) sold cooling tower products to Appellees’ customers. Appellant Companies are wholly owned by Appellants and were organized in North Carolina and Georgia, respectively. Appellees sued for breach of the Confidentiality Agreement and tortious interference of contractual relations, among other counts. Appellant Wife and Appellant Companies filed a joint motion to dismiss for lack of personal jurisdiction. The Circuit Court for Carroll County denied the motion.

Analysis:  Appellant Wife argued that she did not consent to jurisdiction in Maryland and did not execute the Confidentiality Agreement, and even if she had, it had expired. Appellant Companies argued that they had no contact with Maryland. Appellees initially argued that Appellant Wife transacted business in Maryland by signing the stock purchase agreement, which was governed by Maryland law, and that Appellant Wife and Appellant Companies are affiliates and alter egos of Appellant Husband. On appeal, Appellees argued that no analysis under the long-arm statute or due process was necessary.

On appeal, Appellees argued that the court could assert personal jurisdiction under the “closely-related” doctrine, which holds that a non-signatory to a contract may be bound by the forum-selection clause if the non-signatory is so closely related to a dispute that it would be foreseeable that it would be bound. The Court held that the doctrine applies to non-signatory, non-residents in the context of motions to dismiss for lack of personal jurisdiction, citing case law from various jurisdictions.

The Court adopted the three-prong test articulated in Carlyle Inv. Mgmt. LLC v. Moonmouth Co. SA, 779 F.3d 214 (3d Cir. 2015). The Carlyle Court had analyzed the application of the doctrine in the context of non-signatory defendants’ motions to dismiss for lack of personal jurisdiction in several Delaware cases. Carlyle held that a defendant who had not signed a subscription agreement was nonetheless bound by its forum selection cause because several of the agreement’s provisions explicitly referenced the close relationship among the various, inter-connected defendant entities. Likewise, the various non-signatory entities on the plaintiff’s side could enforce the clause because they were affiliates. Also, but for the original subscription agreement that contained the forum selection clause, the disputes at issue—concerning, in part, subsequent release agreements—would not have arisen.

Applying the Carlyle test, the Court held: (1) that the forum selection clause was valid; (2) that Appellees’ claims arose out of Appellant Wife’s and Appellant Companies’ status in relation to the Confidentiality Agreement; and (3) that Appellant Wife and Appellant Company were closely related to the contractual relationship so that it would be foreseeable that they would be bound. To determine the third question, the Court examined the non-signatory’s ownership of the signatory, its involvement in negotiations, the relationship between them, and whether or not the non-signatory received a direct benefit from the Confidentiality Agreement.

As for Appellant Wife, her husband’s execution of the Confidentiality Agreement was consideration for the sale of the Company, and the entire case is premised on his conduct—in concert with her and the Appellant Companies—that purportedly violated the Confidentiality Agreement. She was a signatory of the stock purchase agreement, which explicitly referenced the Confidentiality Agreement. Also, through her ownership of Appellant Companies, she directly, financially benefitted from her husband’s conduct.

As for Appellant Companies, Appellant Husband was a co-owner and an officer of both; he was the registered agent of one; the principal places of business were the home address; he had signed checks and tax forms on their behalf; and records confirmed that he had conducted business on their behalf. Appellant Companies had derived a benefit, as they had conducted business with Appellees’ suppliers and competitors. Appellant Husband alone involved the Appellant Companies in the situation at issue. To ignore this would allow Appellant Husband to evade the forum-selection clause and undermine the Confidentiality Agreement. Thus, the Court affirmed.

The opinion is available in PDF here.