Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—6th Cir.: Forum selection clause does not prevent suit by distributor of fire extinguishers, (Apr 15, 2024)

By Seth Abrams, J.D., M.A.

Because a joint venture agreement did not apply to the plaintiff, the agreement’s forum-selection clause did not apply.

The Sixth Circuit reversed and remanded a trial court’s determination that the forum selection clause applied to bar a suit filed by a distributor of fire extinguishers against a manufacturer. A fire extinguisher distributor filed the suit against the British manufacturer, alleging breach of contract and breach of warranty as a result of worsening problems with the extinguishers. The district court applied the “closely related” doctrine, holding that distributor was sufficiently closely related to the contract for the court to apply and enforce the forum-selection clause against a non-signatory plaintiff, and dismissed the action. The manufacturer appealed, arguing that the district court applied the wrong law, and correspondingly the wrong analytical approach, to determine the contract’s applicability. The appellate court agreed and reversed and remanded the case (Firexo, Inc. v. Firexo Group Ltd., April 12, 2024, Batchelder, A.).

Firexo Group Limited (FGL), a British company, manufactures fire extinguishers. In 2019, FGL partnered with Scot Smith, an Ohio citizen, to sell its fire extinguishers in the United States. They entered a Joint Venture Agreement (JVA) in which Smith bought from FGL 70% of its wholly owned subsidiary, plaintiff distributor Firexo Corporation. Firexo was not a party to the JVA. The JVA has a forum-selection clause designating that England or Wales is the forum for any dispute “in connection with” the agreement.

In 2021, because of alleged “ongoing and worsening” problems with the fire extinguishers, Firexo sued FGL in an Ohio court. The complaint does not name Smith as a plaintiff and does not reference the JVA. FGL removed the case to federal court on diversity grounds, and then moved to dismiss on the JVA’s forum selection of England or Wales. The district court granted the motion finding that Firexo was bound by the terms of the JVA even though it was not a party to the JVA. It reasoned that “even though Firexo was not a signatory to the JVA, the JVA’s forum selection clause applied because Firexo and it claims were so ‘closely related’ to the JVA that it was ‘foreseeable’ that the clause would apply.”

Firexo argued that there are two separate steps to analyzing a forum-selection clause. The first is applicability based on state law and/or the law of the contract and the second is enforceability based on federal common law. Firexo contended that a forum selection clause’s applicability “is distinct from and antecedent to its enforceability, so the district court had to begin with the ordinary Erie approach to contract interpretation.” FGL contended that applicability is “part of the federal law of enforceability, so the district court was correct to begin (and end) with federal common law ‘closely related’ doctrine.

Circuit split. There is a circuit split on this very issue. Some circuits apply federal common law and the “closely related” doctrine to whether forum selection clauses apply. These cases “see forum selection as a purely procedural issue of venue selection,” which is governed by federal common law. On the other side of the split are cases that apply Erie to the forum selection clause, as the majority opinion did here.

Lead opinion. The lead opinion concluded that a forum selection clause’s applicability is “distinct from and antecedent to” its enforcement, so the district court erred in not applying traditional Erie analysis. Courts must decide first using Erie principles the issue of applicability. Looking at the facts of the forum selection clause, the court accepted “English law as the law governing the JVA’s forum selection clause.” Upon review, English law does not permit the enforcement of a contract against a non-party to the contract. So, relying upon English law, the forum selection clause does not apply to Firexo. As a result, it was error for the trial court to dismiss the case on these grounds.

Concurring opinion. Judge Larsen agreed that the applicability of a forum selection clause is a question of applicability distinct from the “enforceability” of the clause. This applicability should be determined by “using the ordinary Erie/Klaxon rules.” On this record, Judge Larsen found that FGL did not adequately identify or argue that an exception to the general English rule requiring privity of contract applied. However, she did not join the lead opinion in full because she saw “no occasion to endorse particular theories of contract law or to discredit the ‘closely related’ test generally.” She concurred in the part of the lead opinion’s analysis that federal common law does not govern “whether a non-signatory is bound by, or can invoke, a forum selection clause in a contract.” Instead, “ordinary Erie/Klaxton rules apply.”

Dissenting opinion. The dissent, written by Judge Griffen, first noted the circuit split on this issue and noted that seven circuits “consider the enforcement of forum-selection clauses a federal procedural issue governed by federal law.” He found that Firexo’s “applicability” argument should be viewed as “enforceability.” Enforceability questions are answered by the “federal closely-related-and-foreseeable test.” He would apply the test and take this opportunity to define its parameters, relying upon Franlink Inc. v. BACE Servs, Inc., and the four factors it espouses to determine whether enforcement is closely related and foreseeable. When these factors are applied to the case at hand, all factors supporting enforcing the forum-selection clause are here. The district court had noted “it is difficult to imagine a non-signatory that could be more closely related to a contract.” As a result, the dissent would conclude that the district court did not err by dismissing the complaint and the forum-selection clause applies to the parties.

The Case is No. 23-3085.

Attorneys: Paul Thomas Belazis (Malone, Ault & Farell) for Firexo, Inc. Jason J. Blake (Calfee, Halter & Griswold LLP) for Firexo Group Ltd.

Companies: Firexo, Inc.; Firexo Group Ltd.

Cases: FranchisingDistribution KentuckyNews MichiganNews OhioNews TennesseeNews