Non-Compete Agreements, Forum Selection Clauses & Third Parties

When a person signs a non-compete agreement, either as part of an employment contract or in-connection with the sale of a business, that agreement invariably contains a forum selection clause.   The general law of forum selection clauses is fairly straightforward:  (1) Courts usually enforce forum selection clauses (2) It takes a clear lack of any connection to the chosen forum for a court to find a forum selection clause unenforceable.  A simple example is helpful:

John lives and works in California.  He runs the California division of ABC Co., a nationwide company headquartered in Boca Raton, Florida.  John signs a non-compete agreement.  That agreement contains a forum selection clause, indicating that jurisdiction and venue are in the Southern District of Florida.

After a few years working with ABC Co., John leaves the company to go work for a competitor, 123 Inc.   123 Inc. is a West Coast operation.  They have all of their offices and operations in Nevada, California, Oregon, Washington and Idaho.  They have no offices in Florida.  They have no employees in Florida.  They never set foot in Florida.  Occasionally, they may sell to some customers with Florida ties, but any Florida business is very limited.

ABC knows John is working for a competitor.  They fire off a cease and desist letter, threatening to sue.  At this point, they’re still feeling it out.   Then, ABC hears it through the grapevine that John is trying to lure away some ABC customers out in California and get them to do business with 123 Inc.  ABC sues.  They sue John for breaching his non-compete agreement, tortious interference with their business relationships and misappropriation of trade secrets (just for good measure, heck, whatever the information is, call it a trade secret and see if it sticks).   But ABC doesn’t sue only John.  They also sue 123 Inc.  They sue 123 Inc. for the exact same claims.  The theory:  John knows secret information, knows the customers, knows their needs, and is going to use everything he knows to help 123 steal those customers— and 123 is complicit in the wrongdoing.

Where does ABC sue?   In the Southern District of Florida, West Palm Beach Division.  John has no real argument here.  He signed the agreement, so he agreed to the choice of forum.  He can be sued and forced to defend himself in Florida.  But what about 123 Inc.?  123 is not a Florida company, doesn’t have any offices in Florida, and does little, if any, sales to customers in Florida.   Can 123 Inc. be sued in the Southern District of Florida?  Well, that depends.

The Closely Related To Doctrine

This is where law becomes somewhat of a shell game.  When courts opine on forum selection clauses, they often fall back on the principles of contract.  In other words, you signed the contract.  You agreed to this forum so deal with it.  But when a plaintiff is trying to rope in third parties?  It’s a whole different ballgame.   A third party – like 123 Inc. in the hypothetical – has not agreed to litigate anything in Florida.  They aren’t a party to any contract.  They’re a complete stranger.

Yet courts have developed a doctrine known as the “closely related to” doctrine, under which a non-party to a contract can be compelled to defend itself in a particular forum if that party is closely related to the contractual dispute at issue.  Unfortunately, courts have not provided much in the way of definitive guidance regarding what exactly is meant by “closely related.”  Rather, courts have simply held that if the third party is closely related and forcing them to litigate in that forum is “foreseeable,” then it’s fine.

Much of the case law on the closely related to doctrine involves third parties who were somehow tied to the transaction at issue.  For instance, a company is being sued for breaching a contract, and a corporate officer or director has also been named as a defendant for fraud and breach of fiduciary duty.   The company agreed to venue in the Southern District of New York.  In that instance, most courts have no problem forcing the corporate officer to defend himself in New York because he was actually part of the transaction that is being litigated.

But in recent cases, plaintiffs have pressed for, and courts have granted, an expanded application of the “closely related to” doctrine.  Rather than roping in third parties who have some real nexus with the underlying transaction, courts are now roping in third parties were that nexus appears lacking.  There’s a big difference between the third party as corporate executive of the sued company and third party as new employer of John Smith.

So, the plaintiff in our hypothetical will sue John and 123 Inc. in the Southern District of Florida and it will be up to 123 to decide whether or not to fight the imposed forum.   If 123 choses to fight the forum, there are two basic lines of attack:  First, 123 is going to attack the vague “closely related to” standard and argue that it does not apply here.  Second, 123 is going to argue that the court lacks personal jurisdiction.  Remember, there’s a difference between the “closely related to” doctrine and personal jurisdiction.  Just because a court could theoretically rope a third party into the forum as being closely related to the dispute, that doesn’t mean jack for the purposes of jurisdiction.  Even if the party is closely related, if Florida courts don’t have personal jurisdiction over 123, then they can’t force 123 to defend itself there.

In some instances, 123 may not want to fight the forum.  123 might think it’s best just to fight the case in Florida.  But on the flip side?  Suppose 123 has strong ties to a law firm based in the Pacific Northwest.  That’s 123’s firm of choice.   If the plaintiff is forced to sue 123 in its home state, say Washington, then 123 gets its regular lawyers on the matter.  If the case is in Florida?  123 still retains their regular lawyers, but also needs local counsel down in Miami, Florida.  Beyond that, there may be certain strategic advantages.  Suppose 123 really could fight the imposed forum and – best case scenario – get itself dismissed from the case for lack of personal jurisdiction.  What happens then?  Well, ABC Co. is in a tough spot.  Now, ABC Co. has to do one of two things:  Either ABC gets the case transferred to Washington state so it can also go after 123, or, ABC files an entirely separate lawsuit against 123 in Washington.   Either way, this makes ABC’s life a bit (or a lot) harder.

Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. His office can be reached at 954-332-2380.