In August 2015, Austin was the cover story for “M”, a magazine published by France’s Le Monde, one of the most respected newspapers in the world. The tag line accompanying an idyllic picture of a classic Austin scene—the Barton Creek green belt, with dogs, swimmers, and hikers sprawled over rolling hills along clear running water—was “Le Texas–C’est sensass!” or, “Texas. It’s fantastic.”
The story has helped my pitches in France for why Texas should be, and is fast becoming, a destination for French startups. The article describes the economic boom in Texas, and the cover photo exemplifies why Forbes in 2016 named Austin #1 on its list of “America’s Next Boom Towns.”
But aside from Austin’s unique quality of life, Forbes named it “the clear star of the show” for its “superlative economy.” Although Austin has seen an uptick in international companies setting up here, all of Texas has been a significant destination for foreign direct investment (France ranks #5 out of the top 10 countries making these investments).
Some reasons why Texas’s four largest cities all made the Forbes top 10 list of America’s “Next Boom Towns:
- With 13 million workers, Texas has the second largest civilian population in the United States
- With its $1.65 trillion economy, if Texas were a country, its economy would be the 10th largest in the world
- Texas has no income tax, which explains its number 2 slot for “Best State Tax System for Entrepreneurship and Small Business”
As a result, based on jobs numbers, “Texas ranks No.1 in the nation for foreign and domestic investment.”
With that influx of investment comes the many contracts required to paper the deals. And with those contracts comes the critical decision for how to resolve disputes if and when they arise.
Parties residing in different states or countries will want to decide on whose turf disputes will be decided for strategic purposes, and may negotiate a forum selection clause (“FSC”) into their contracts. It’s also possible that key deal points may be so time-consuming that the negotiators give little thought to dispute resolution. The FSC should never be relegated to boilerplate. (Even the United States Supreme Court recently entered the fray, stepping in to resolve a circuit conflict and reaffirming the importance of FSCs by clarifying how to enforce them in federal court.)
Texas and not-Texas companies entering into contracts with multiple parties, amendments, and exhibits need to pay particular attention to the forum and venue provisions laid out in those amendments, and how other contract provisions can affect their interpretation. A recent Texas Supreme Court case brings that point home.
Pinto Technology Ventures, L.P. v. Sheldon, No. 16-0007, 2017 WL 2200357 (Tex. May 19, 2017)
The FSC in Pinto Technology Ventures read as follows:
[T]he Delaware state courts of Wilmington, Delaware (or, if there is exclusive federal jurisdiction, the United States District Court for the District of Delaware) shall have exclusive jurisdiction and venue over any dispute arising out of this Agreement, and the parties hereby consent to the jurisdiction of such courts.
Straightforward, right? Not necessarily. This provision led to approximately four years of litigation, a split decision at the court of appeals, an evenly divided en banc panel at the court of appeals that denied reconsideration, and a unanimous decision at the Texas Supreme Court that reversed the court of appeals’ judgment as the cherry on top.
The sticking points were: (1) whether the tort claims comprised a “dispute” that “arose out of” a 2010 Shareholder Agreement, and (2) whether two individuals, non-signatories, could invoke the FSC and have the case against them transferred to Delaware. (Incidentally, this same type of framework applies to determine the scope of arbitration provisions. Choosing arbitration for “disputes” or “claims” “arising out of” an agreement means choosing an arbitral forum: arbitration provisions are “a type of forum-selection clause.” In re AIU Ins. Co., 148 S.W.3d 109, 115 (Tex. 2004).).
Before we jump to the conclusion of who was ultimately bound to that FSC and who was sent to litigate in Delaware after four years of litigation in Texas, a reminder about forum, venue, and jurisdiction is in order. These distinct concepts are often lumped together and frequently mislabeled, even in court decisions.
- Forum. “‘Forum’ generally refers to a sovereign or a state.” Ramsay v. Tex. Trading Co., 254 S.W.3d 620, 627 (Tex. App.—Texarkana 2008, pet. denied).
- Jurisdiction (the personal kind). An FSC may also include the parties’ consent to personal jurisdiction even though courts hold the FSC shows implied consent to personal jurisdiction. g., Baker Hughes Inc. v. Brooks, 405 S.W.3d 246, 249 (Tex. App.—Houston [14th Dist.] 2013, pet. denied). (Complaints about personal jurisdiction can be waived (like objections to forum and venue), but remember that subject matter jurisdiction—whether a particular court has legal authority to enter any judgment at all—can never be waived or conferred by consent, such as through a contract. E.g., Drake v. Trinity Universal Ins. Co., 600 S.W.2d 768, 772 (Tex. 1980).
- Venue. “Venue concerns the geographic location within the forum where the case may be tried.” Cantu v. Howard S. Grossman, P.A., 251 S.W.3d 731, 734 (Tex. App.—Houston [14th Dist.] 2008, pet. denied). Texas has 254 counties, which may explain why venue is such a treasured concept. With venue holding such a special place in the Texas legal system, the law is hostile to parties’ contracting around the default venue rules. Parties may, however, contract for venue in a “major transaction”—defined as “a written agreement under which a person pays or receives, or is obligated to pay or entitled to receive, consideration with an aggregate stated value equal to or greater than $1 million….” Tex. Civ. Prac. & Rem. Code Ann. § 15.020; see also In re Fisher, 433 S.W.3d 523, 535 (Tex. 2014) (enforcing contractual venue selection clause as cause of action arose out of a “major transaction”). Commentators have noted an anomaly: if a case is filed outside Texas, and the contract’s FSC selects a venue in Texas, that court would enforce it, whereas a Texas court looking at the same provision may not enforce given Texas venue law. Paul Yetter & Richard Farrer, The Evolution of Forum-Selection Clause Enforcement in Texas, 73 Tex. B.J. 274, 276 (Apr. 2010).
Back to Pinto Technology Ventures: how did an FSC lead to 4 years of litigation?
The backstory will sound familiar to transactional attorneys. Sheldon and Konya held shares in IDEV Technologies: Sheldon as founder and Konya as a consultant and co-inventor of a technology that IDEV licensed (the “Shareholders”). After many rounds of financing, the two saw their ownership interests diluted to 1%, with the culprit alleged to be a 2010 Amended and Restated Shareholders Agreement. The Shareholders chose a Texas venue to file their lawsuit. They sued the VCs, officers of IDEV, and IDEV directors (collectively “IDEV”)—and for tort claims only. IDEV invoked the FSC and asked that the Texas lawsuit be dismissed.
That 2010 Agreement played a starring role in the litigation, but it was part of a long history: shareholder agreements, financing agreements, and amendments all relating to Series A, Series B, and Series B-1 financings, each one having the same or varying terms regarding the effect of amendments and who was bound and how. There was more than enough fodder to trigger a full-scale press at trial and on appeal.
In the end, the supreme court held that the entire case had to be sent to Delaware, except for the case against two individuals, IDEV officers sued in their individual capacities. The litigation against them would stay in Texas. How the supreme court resolved these questions is a good reminder that no one provision lives alone in a contract. Courts look at the entire contract for insight into the parties’ intent.
- “Dispute.” The parties’ use of the word “dispute” in the FSC meant they referred to any “conflict” giving rise to a lawsuit: a “dispute” is necessarily broader than a “claim,” which could have more plausibly referred only to contract-specific claims.
Lesson: Including only “claim” in an FSC could prevent tort claims from being sent to the chosen forum, resulting in two courts deciding issues in a single case. If you intend to go broad in scope, Pinto Technology could be the authority for reducing the verbiage in your FSC and just making all “disputes” subject to the FSC (rather than an endless list of “claims, causes of actions, disputes, conflicts, disagreements, etc.”).
- “Arising from.” The Shareholders pleaded tort only claims, no breach-of-contract claims. Did these tort claims “arise from” the contract? Analyzing many authorities on but-for causation to confirm the breadth of that approach (which is no limitation at all: “it literally embraces every event that hindsight can logically identify in the causative chain”), the supreme court held that no amount of artful pleading allows a party to escape having tort claims be included in such an FSC such as this one. The test is a common-sense one based on the factual allegations, not labels.
Lesson: If you are aiming for breadth, it may suffice now to include only “arising from,” though I still prefer a belt-and-suspenders approach, including “relating to,” which suggests a broader scope and may still be what some courts want to see to trigger a broad FSC scope. Some dicta in here deserves special mention. The supreme court noted the Shareholders may have had a good argument that “general obligations imposed by law” (i.e., tort duties) cannot arise out of a contract, but here the parties used the broad term “dispute” rather than “claims,” which could arguably show intent to carve out tort claims. This distinction between “disputes” and “claims” means anyone seeking a broad FSC should be careful when mentioning “claims” alone.
- Non-signatories. Although theories exist to capture non-signatories into an FSC, the “transaction participant theory” and the “concerted misconduct doctrine,” the court addressed only the former, which applies when non-signatories are “closely related to the contractual relationship.” Pinto Tech., 2017 WL 2200357, at *11.
Here’s where other provisions in the 2010 Agreement came into play. Contracts typically include provisions to foreclose third-party beneficiary arguments. The provision here read like so: “This Agreement … shall inure to the benefit of and be binding upon, the successors, permitted assigns, legatees, distributees, legal representatives and heirs of each party and is not intended to confer upon any person, other than the parties and their permitted successors and assigns, any rights or remedies hereunder.” Id. at *12.
Usually the provision is boilerplate, but this one allowed the Shareholders to keep their Texas forum (and venue) against the individuals. The supreme court held this language reflected the parties’ contractual intent that no other person, no “transaction participant,” could benefit from the Agreement. Thus, the two individuals could not invoke the FSC and defend the claims in Delaware. Had other contract language been different, the result could have been different, as in the arbitration case, In re Rubiola, 334 S.W.3d 229 (Tex. 2011) (orig. proceeding) in which the contract defined the parties bound by the agreement as not just the corporate entities but also “officers, directors, employees, agents…of any party”—which thus made non-signatory individuals subject to the arbitration provision. As of this writing, the supreme court’s docket shows that was the sole point on which any party in the case moved for rehearing.
Lesson: Take a good look at that boilerplate in any template and how it fits with the deal points being drafted. Many traps lurk within a poorly thought out FSC, including the ones listed here on scope and non-signatories, and others such as accidentally foreclosing any option to proceed in federal court in the chosen forum. Lastly, although no one can predict what creative arguments may arise in litigation, consulting your favorite litigator to help spot issues is always a good idea.
This update is for informational purposes only and should not be considered legal advice. Each situation is different, could change any time, and should be analyzed by an attorney.