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adopting broader reading of Amplicon and reasoning that dismissal is an appropriate means of enforcing an otherwise valid forum selection clause, even where an alternative federal forum is available
Summary of this case from Dorsey v. Northern Life Insurance Co.Opinion
3:02-CV-2585-M
October 9, 2003
MEMORANDUM OPINION AND ORDER
I. BACKGROUND
Plaintiffs VarTec Telecom, Inc. and VarTec Telecom Holding Company (collectively "Plaintiffs" or "VarTec") assert claims for common law fraud, statutory fraud under § 27.01 of the Texas Business and Commerce Code, securities fraud under § 33(A)(2) of the Texas Securities Act, and federal securities fraud under § 10(b) of the Securities Exchange Act and Rule 10b-5, against Defendants BCE, Inc. and BCE Ventures, Inc. (collectively "BCE"). Additionally, Plaintiffs assert a claim under § 20(a) of the Securities Exchange Act, for control person liability with respect to the § 10(b) and Rule 10b-5 claims, against William D. Anderson, the former CFO of BCE, Inc. and the President of BCE Ventures.
VarTec provides local and long distance service, and BCE is a Canadian communications company. Teleglobe Holdings (US) Corporation and Teleglobe, Inc. (collectively "Teleglobe") are subsidiaries of BCE. Excelcom, Inc., Excel Communications (Canada) Inc., and Telco Communications Group (collectively "Excel") were subsidiaries of BCE.
On August 26, 2001, VarTec and Teleglobe executed a Stock Purchase Agreement wherein VarTec agreed to purchase the Excel stock from Teleglobe. BCE's General Counsel, Michel Lalande, signed the agreement on behalf of Teleglobe, Inc., and Anderson signed the agreement on behalf of Teleglobe Holdings (US) Corporation. On April 5, 2002, VarTec and Teleglobe executed an Amended Stock Purchase Agreement and VarTec purchased the Excel stock. (Hereinafter, the August 2001 and April 2002 agreements will be collectively referred to as the "SPA.") According to Plaintiffs, one of the material components of the SPA was the "your watch, my watch" concept, whereby Teleglobe liabilities incurred prior to closing were to be paid by Teleglobe, not VarTec. On April 24, 2002, BCE announced its intent to cut off all financial support to Teleglobe. On May 15, 2002, Teleglobe sought the protection of Canada's Companies' Creditors Arrangement Act. On May 28, 2002, Teleglobe filed for protection under Chapter 11 of the United States Bankruptcy Code in the District of Delaware. According to Plaintiffs, Teleglobe's bankruptcy calls into question the significant financial obligations of Teleglobe under the SPA. Plaintiffs contend that, as a result, Plaintiffs face in excess of $250 million in damages and liabilities resulting from the Excel purchase.
According to Plaintiffs, most of the negotiations regarding the Excel purchase were conducted between VarTec and representatives of BCE, including Anderson, hi fact, according to Plaintiffs, the original conception of the Excel purchase would have named BCE, not Teleglobe, as the selling party. Plaintiffs contend that BCE represented to VarTec that the substitution of Teleglobe as the selling party was a mere technicality, that Teleglobe was an investment-grade company, that BCE was committed to supporting financially Teleglobe in the future, and that Teleglobe would be able to fulfill its commitments under the SPA. VarTec alleges that, absent these representations, VarTec would not have agreed to have Teleglobe as the sole contracting party, In addition to this suit against BCE and Anderson, VarTec has asserted in bankruptcy court claims against Teleglobe, including claims for breach of contract.
In addition to arguing that the Court should dismiss this action under Federal Rules of Civil Procedure 12(b)(6) and 9(b), Defendants contend that the Court should dismiss this action for improper venue under Federal Rule of Civil Procedure 12(b)(3) because the SPA, signed by Plaintiffs and Teleglobe, includes in Section 14.1 the following forum selection clause:
Subject to Sections 2.3, 2.4 and 13.8, each party hereto irrevocably submits to the exclusive jurisdiction of the District of Columbia for the purposes of any suit, action, arbitration or other proceeding arising out of this Agreement, the Ancillary Agreements, the Warrant or any transaction contemplated hereby or thereby.
Because the Court concludes that this action is properly dismissed for improper venue under Rule 12(b)(3), the Court does not reach Defendants' other arguments.
II. ANALYSIS
In analyzing whether the Court should dismiss Plaintiffs' suit under Rule 12(b)(3) for improper venue because of the SPA's forum selection clause, the Court must resolve (1) whether Defendants as nonsignatories to the SPA may enforce the forum selection clause, (2) whether the forum selection clause in the SPA applies to the claims asserted by Plaintiffs, and (3) whether the Court should consider the balancing factors in 28 U.S.C. § 1404(a) when determining whether to dismiss for improper venue.
A. Whether Defendants as nonsignatories to the SPA may enforce the forum selection clause
Defendants contend that, even though they are not signatories to the SPA, they may enforce the forum selection clause under the doctrine of equitable estoppel. Although the Fifth Circuit has not specifically addressed whether a nonsignatory to a contract may enforce a forum selection clause therein, the Fifth Circuit has addressed whether a nonsignatory to a contract may enforce an arbitration clause therein. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524 (5th Cir. 2000). In Grigson, the Fifth Circuit stated that, under the doctrine of equitable estoppel, a nonsignatory may compel arbitration in two circumstances: (1) when a signatory to a written agreement must rely on the terms of the written agreement in asserting its claims against the nonsignatory, or (2) when a signatory to the contract raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Id. at 527 (adopting the test formulated by the Eleventh Circuit in MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999)). The Fifth Circuit stated: "The linchpin for equitable estoppel is equity-fairness. For the case at hand, to not apply this intertwined-claims basis to compel arbitration would fly in the face of fairness." Id. at 528.
Plaintiffs and Defendants agree that the Fifth Circuit's Grigson test applies to forum selection clauses. The Fifth Circuit has recognized that arbitration clauses are a subset of forum selection clauses and has noted that "there is very little difference between the two." Haynsworth v. The Corporation, 121 F.3d 956, 963 (5th Cir. 1997). Further, as in the context of arbitration clauses, to allow a party to "have it both ways" by asserting claims intertwined with the agreement but denying the forum selection clause's applicability would "fly in the face of fairness." Therefore, in light of the parties' agreement that Grigson applies, the similarity between arbitration clauses and forum selection clauses, and the equitable underpinnings for applying Grigson to forum selection clauses, the Court will apply Grigson to determine whether Defendants may enforce the SPA's forum selection clause.
In Grigson, the plaintiffs claimed that the defendants tortiously interfered with a movie distribution contract between the plaintiffs and Columbia TriStar Home Video, Inc. ("TriStar") by pressuring TriStar to limit the release of a movie. Grigson, 210 F.3d at 526. The Fifth Circuit found that the plaintiffs relied on the terms of the distribution contract in asserting their claim for tortious interference. Id. at 530. As part of their claim, the plaintiffs had to show that TriStar had breached the distribution contract by failing to exercise its good faith judgment in promoting, exploiting, and distributing the movie. Id. at 529-30. Damages would also be computed by referring to the detailed accounting provisions of the distribution contract. Id. at 530.
Similarly, in this case, Plaintiffs' claims are premised on Teleglobe's breach of the SPA. As conceded by Plaintiffs' counsel during oral argument, if Teleglobe had fulfilled all of its financial obligations under the SPA, Plaintiffs would not have a damages claim against Defendants. Here, Plaintiffs' damages are computed by referring to the obligations under the SPA that Teleglobe has not performed. Therefore, Grigson supports Defendants' position that Plaintiffs rely on the terms of the SPA in asserting their claims, so as to entitle Defendants to enforce the forum selection clause.
Plaintiffs contend, however, that the "Fifth Circuit has considered and rejected non-parties' efforts to invoke the arbitration clause under strikingly similar facts." (Pl.'s Resp. at 9, citing Westmoreland v. Sadoux, 299 F.3d 462 (5th Cir. 2002)) In Westmoreland, the plaintiff, Pentrade Limited (wholly owned by the defendant Sadoux), and T.D.C. Trade Development Company (wholly owned by the defendant Hendrickx) co-owned Aston Holdings and were parties to a shareholder agreement with an arbitration clause. 299 F.3d at 464. The plaintiff sued the defendants Sadoux and Hendrickx for fraud, claiming that they misrepresented that Aston Holdings was struggling so that the plaintiff would sell his Aston stock to Pentrade and T.D.C. for a deflated price. Id. The defendants Sadoux and Hendrickx tried to hold the plaintiff to the arbitration clause in the shareholder agreement to which the plaintiff was not a party. Id. In refusing to require arbitration, the Fifth Circuit concluded that the plaintiff's suit did not rely upon the terms of the shareholder agreement. Id. at 467.
One major distinction between Westmoreland and the current case is that, in Westmoreland, the arbitration clause was in a pre-existing shareholder agreement entered into well before the transaction which was the subject of the suit. Here, the stock purchase agreement was entered into contemporaneously with the giving of the alleged misrepresentations that are the basis of Plaintiffs' claims. Further, and most importantly, in Westmoreland the plaintiff's claim was not premised on a breach of the agreement containing the arbitration provision. Finally, in Westmoreland the plaintiff's damages were not calculated by referring to the agreement containing the arbitration clause, In light of the distinctions between it and this case, the Court concludes that Westmoreland is not controlling.
Because Plaintiffs' claims are premised on Teleglobe's breach of the SPA and because Plaintiffs' damages are calculated with reference to the SPA, Plaintiffs rely on the terms of the SPA in asserting their claims against Defendants. Because the Court finds that Plaintiffs rely on the terms of the SPA in asserting their claims against Defendants, the Court is not compelled to consider whether Plaintiffs raise allegations of substantially interdependent and concerted misconduct by a signatory and a nonsignatory. However, as recognized by the Fifth Circuit in Grigson, "[E]quitable estoppel is much more readily applicable when the case presents both independent bases . . . for applying the intertwined-claims doctrine." Grigson, 210 F.3d at 527-28. Therefore, the Court analyzes whether the second independent basis is also applicable. Defendants contend that Plaintiffs assert concerted fraudulent conduct by nonsignatory BCE and signatory Teleglobe.
Although Plaintiffs argue that "VarTec does not allege that Teleglobe participated in BCE's fraudulent misconduct, but that Teleglobe fell victim to it as well," the Court finds that Plaintiffs assert concerted fraudulent misconduct by BCE and Teleglobe. It is axiomatic that Teleglobe, as an entity, could only have participated in concerted misconduct through its agents. Anderson, who signed the August 26, 2001 agreement on behalf of Teleglobe, was an agent of both BCE and Teleglobe. Therefore, by asserting that Anderson engaged in fraud while negotiating the SPA, Plaintiffs have asserted the concerted misconduct of BCE and Teleglobe. Additionally, Plaintiffs have represented to the Teleglobe bankruptcy court that Teleglobe was involved in misconduct, In a motion to the Teleglobe bankruptcy court, Plaintiffs stated: "VarTec was repeatedly assured that the Debtors [Teleglobe] would meet these obligations. . . . If the Debtors fail to honor their agreements, they will succeed in subverting the central premise of the Excel transaction." (Supplemental Decl. of Beck, Ex. S)
Alternatively, even if Plaintiffs have not asserted concerted fraudulent conduct by Defendants and Teleglobe, Plaintiffs' allegations of Defendants' fraud and Teleglobe's breach of contract are sufficient to constitute allegations of "concerted misconduct" under Grigson. In Grigson, the Fifth Circuit found that the plaintiff's alleged concerted misconduct where one of the plaintiff's had instituted an earlier action against the signatory, TriStar, for breach of contract and, in the alternative, fraud. Grigson, 210 F.3d at 530. The Fifth Circuit stated: "[TriStar's] earlier-charged failure to use its contractually-required `good faith judgment' was now alleged to have been caused by `pressure' from the new defendants . . . In reality, the two actions are the same. In essence, TriStar is a defendant. Each action turns on the meaning of the distribution agreement's numerous-often intricate-provisions, which are unique to the film industry, and on TriStar's conduct in relation to that agreement." Id. By focusing on TriStar's "conduct in relation to that agreement," the Fifth Circuit's analysis appears to center on the allegation that TriStar breached the agreement rather than on the alternative allegation that TriStar committed fraud. Therefore, the allegation that a nonsignatory breached a contract can constitute an allegation of "misconduct" under Grigson. Here, Plaintiffs allege that Teleglobe breached the SPA and that Defendants fraudulently represented that Teleglobe would not breach the SPA. Therefore, even if Plaintiffs have not alleged fraudulent misconduct on the part of Teleglobe, Plaintiffs have alleged concerted misconduct by Defendants and Teleglobe.
Because both prongs of the Grigson test are satisfied and because it would be inequitable to allow Plaintiffs to deny the applicability of the forum selection clause while simultaneously seeking to hold Defendants liable for Teleglobe's obligations under the SPA, the Court finds that, under the doctrine of equitable estoppel, Defendants are entitled to enforce the forum selection clause.
Plaintiffs additionally argue that Defendants are not entitled to enforce the forum selection clause because the SPA contains the following No Third-Party Rights clause: "Except as otherwise expressly provided for herein (including in Article 13 with respect to Stockholder Indemnified Parties and Buyer Indemnified Parties and in Sections 6.9, 7.3, 7.4, 7.5, 7.8 and 10.7) with respect to the Persons specified therein, nothing in this Agreement, express or implied, is intended to confer on any Person any rights or remedies by reason of this Agreement." (Section 14.8 of the SPA) The excluded provisions grant third parties affirmative rights under the contract, such as directors' and officers' rights to indemnification (7.4) and BCE's right to appoint a designee to VarTec's board of directors (10.7). The Court concludes that the clause bars third parties from seeking affirmative remedies for violations of the contract, not from enforcing the contract's forum selection clause under the doctrine of equitable estoppel.
B. Whether the forum selection clause in the SPA applies to the claims asserted by Plaintiffs
Plaintiffs contend that, even if Defendants are entitled to enforce the forum selection clause, fraud claims are exempted from the scope of the forum selection clause. Section 14.1 of the SPA states in part: "Subject to Sections 2.3, 2.4 and 13.8, each party hereto irrevocably submits to the exclusive jurisdiction of the District of Columbia. . . ." Section 13.8(c) states in part: "The Parties agree that every dispute, controversy or claim arising out of or relating to this Agreement, the Ancillary Agreements, the Warrant or the transactions contemplated hereby (other than . . . (b) one involving fraud . . .) (each an `Arbitrable Contested Claim') shall be resolved as set forth in clauses (d) through (j) of this Section 13.8." In essence, Section 13.8 exempts fraud claims from the arbitration provisions. Plaintiffs interpret the interaction of Sections 14.1 and 13.8 as follows: "Because the scope of the arbitration clause is incorporated by reference into the forum selection clause, fraud claims are exempted from both clauses and have no application here." (Pl.'s Resp. at 12) However, as convincingly argued by Defendants, Plaintiffs' interpretation is unsound because the forum selection clause would as a result be rendered meaningless. Arbitrable claims would be governed by the arbitration clause, and claims exempt from the arbitration clause would similarly be exempt from the forum selection clause. Because that result is wholly illogical and inconsistent with the language used, the Court finds that Plaintiffs' fraud claims are not exempt from the forum selection clause.C. Whether the Court should consider the balancing factors in 28 U.S.C. § 1404(a) when determining whether to dismiss for improper venue
Plaintiffs contend that, in analyzing a motion to dismiss for improper venue because of a forum selection clause, the Court should consider the balancing factors in 28 U.S.C. § 1404(a). In support, Plaintiffs rely on a line of district court cases that hold as follows: "When a federal court sitting in diversity must decide whether to enforce a forum-selection clause in which the parties have agreed to resolve their disputes in another federal court, 28 U.S.C. § 1404(a) governs the Court's decision." Elliott v. Carnival Cruise Lines, 231 F. Supp.2d 555, 558 (S.D. Tex. 2002); Brock v. Baskin-Robbins USA Co., 113 F. Supp.2d 1078, 1085 n. 3 (E.D. Tex. 2000). These district court cases rely on Stewart Org., Inc. v. Ricoh, 487 U.S. 22 (1988).
However, as recognized by the Fifth Circuit in International Software Systems, Inc. v. Amplicon, Stewart addresses the proper analysis for determining motions to transfer venue, not for determining motions to dismiss. Int'l Software Sys., Inc. v. Amplicon, Inc., 77 F.3d 112, 115 (5th Cir. 1996). The Fifth Circuit states: "Although we would prefer to apply the same Stewart balancing in diversity cases to motions to dismiss and motions to transfer, the other federal courts have decided otherwise and continue to apply Bremen to motions to dismiss based on a forum selection clause. . . . We choose to join the other courts rather than to make a circuit split and further complicate this area of the law." Id. at 115. The district courts cited by Plaintiffs limit the Fifth Circuit's holding to cases where the forum selection clause mandates a state forum and thus § 1404(a) is inapplicable. E.g., Elliott, 231 F. Supp.2d at 558. This attempted distinction is unconvincing, however, in light of the more general analysis that the Fifth Circuit uses in International Software.
Therefore, the Court follows International Software and presumptively enforces the forum selection clause unless Plaintiffs "clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching." Int'l Software Sys., Inc., 77 F.3d at 114 (quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972)). Here, Plaintiffs have not asserted any reason that enforcement of the forum selection clause would be unreasonable and unjust. Therefore, the Court finds the forum selection clause to be enforceable and dismisses Plaintiffs' suit for improper venue.
III. CONCLUSION
In conclusion, the Court finds that Defendants are entitled under the doctrine of equitable estoppel to enforce the forum selection clause in the SPA, that the forum selection clause in the SPA applies to Plaintiffs' claims in this suit, and that the forum selection clause is enforceable under Bremen. Therefore, the Court concludes that this action is properly dismissed for improper venue under Rule 12(b)(3).
Prior to the Court's ruling on Defendants' Motion to Dismiss, Defendants had not filed a Motion to Transfer Venue and thus an analysis of the factors in 28 U.S.C. § 1404(a) was unwarranted. After ruling on Defendants' Motion to Dismiss, solely for the convenience of the parties, the Court offered Plaintiffs the opportunity to file an unopposed motion to transfer venue to a proper forum. In response, Plaintiffs have filed an unopposed motion to transfer venue to the United States District Court for the District of Columbia. For the convenience of the parties, the Court grants Plaintiffs' Motion to Transfer Venue rather than dismissing Plaintiffs' suit and requiring Plaintiffs to refile in the District of Columbia.
SO ORDERED.