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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Court of Chancery Clarifies a Plaintiff’s Ability to Bind a Non-Signatory to a Forum Selection Provision
In Neurvana Medical, LLC v. Balt USA, LLC, the Court of Chancery declined to exercise personal jurisdiction over a French company, Balt International, S.A.S., the parent of Balt USA, LLC. The Court rejected Neurvana’s argument that Balt International was so “closely related” to the asset purchase agreement at issue that the agreement’s forum selection clause bound Balt International, even though Balt International was a non-signatory. The Court also declined to assert jurisdiction over Balt International based on the assertion that Balt USA was Balt International’s agent. Thus, the Court granted Balt International’s motion to dismiss.
The Court provides an insightful history of the “closely-related” test, and particularly the foreseeability inquiry, which the decision views as contributing to criticism of the closely-related test. Opinion at 1. Under Capital Group Cos. v. Armour, 2004 WL 2521295 (Del. Ch. Oct. 29, 2004), a non-signatory to an agreement may be bound to the agreement’s forum selection clause if the non-signatory is “closely related” to the agreement. To be closely related, a non-signatory must receive a direct benefit from the agreement or it must have been foreseeable that the non-signatory would be bound by the agreement.
Here, the Court found neither one applied. Neurvana did not allege that Balt International received any benefit from the agreement or that the agreement was conditioned upon a benefit to Balt International. Thus, the Court concluded that there was no direct benefit to Balt International.
The Court also concluded that it was not foreseeable that Balt International would be subject to the agreement’s forum selection clause. Parsing the few cases in which foreseeability alone was a basis for jurisdiction over a non-signatory, the Court determined that the foreseeability inquiry was limited to “controlled non-signatories” with a “clear and significant connection to the subject matter of the agreement.” Opinion at 14-15 (quoting iModules Software, Inc. v. Essenza Software, Inc., 2017 WL 6596880, at *3 (Del. Ch. Dec. 22, 2017)). The Court found that this limited approach best balances respect for principles of corporate separateness against the risk that a signatory could use a controlled non-signatory to skirt a forum selection clause.
Applying this framework, the Court concluded that there was no basis to bind Balt International to the forum selection clause in the agreement. Balt USA does not control Balt International, and non-signatory status was not being used to avoid a forum selection clause. The Court also rejected Neurvana’s attempt to expand the foreseeability inquiry to cover Balt International because Balt International was involved in the negotiation of the agreement at issue. In doing so, the Court expressly rejected the broader approach to the foreseeability inquiry taken in a recent decision by the District Court for the District of Delaware.
Finally, the Court rejected Neurvana’s argument that an agency theory provided a basis for jurisdiction because Balt International is the parent of Balt USA. The Court noted that subsidiaries are not automatically agents of parents, and regardless, Neurvana’s complaint failed to allege that Balt International “controls and dominates [Balt USA’s] activities.” Id. at 21 (quoting Cantor Fitzgerald, L.P. v. Prebon Secs. (USA) Inc., 731 A.2d 823, 830 (Del. Ch. 1999)).
After its initial decision, the Court also denied Neurvana’s Motion for Reargument. Neurvana asserted that the Court had overlooked its request for jurisdictional discovery. Because the Court’s decision concluded that Neurvana had not supplied a non-frivolous basis for jurisdiction, it was implicit in the Court’s decision that jurisdictional discovery would have been improper. Thus, the Court denied reargument.