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by Andrew Flake

For commercial parties entering into a contract, the opportunity to select where a dispute will be heard is an advantage. Thus it is, in a contract entered into before a dispute arises, we have forum-selection clauses in favor of a particular location and court, just as we have arbitration clauses in which the parties agree to submit their dispute to arbitration. In both cases, to require litigation or arbitration in the selected forum by a party requires a contract signed by that party.

Under certain special and very limited doctrines, however, a non-party can be required to arbitrate, in most cases, under well-established state-law rules, underpinned by considerations of fairness, concerning when a contract binds a non-signatory.

For example, court routinely bind companies that the facts establish are really the “alter ego” of another company, or in cases in which the non-party has itself asserted claims under the contract containing an arbitration clause. Because they do implicate fairness and due process, courts apply them in a circumspect fashion.

But one basis for joining a third-party that we sometimes see arises under federal law, has been less well-developed: the “closely related” doctrine. In short, where it has been applied, the gist of the closely-related doctrine is that a non-signatory can be joined, despite not being a party, because it is closely related to a signatory such that being required to arbitrate would be foreseeable.

For advocates in the commercial litigation arena, the doctrine, because it implicates corporate affiliate relationships and inter-company arrangements of various kinds, is worth understanding, both as to its limitations and justifications.

A good jumping-off point for this purpose is a very recent case, Firexo, Inc. v. Firexo Grp. Ltd.

To set the stage, the non-signatory problem can arise in at least two scenarios, depending on which side seeks to enforce the arbitration clause: a plaintiff (or claimant in arbitration) seeking to enforce the clause against a non-signatory defendant (or respondent in arbitration), or a defendant seeking to enforce the clause against a non-signatory plaintiff.

Firexo involved the second scenario; a U.S. company, Firexo, sued its minority owner, FGL, a British company, in an Ohio court. FGL removed the case to federal court and moved to dismiss, based on a forum-selection clause designating England or Wales as the exclusive jurisdiction. The forum selection clause was in a joint venture agreement between an individual, Scot Smith, and FGL; it concerned their shared ownership of Firexo, but it was not signed by Firexo. Nonetheless, in dismissing the case, the district court applied the closely-held doctrine to bind Firexo to the forum-selection clause.

In doing so, the district court adopted an approach taken by the Fifth Circuit in Franlink Inc. v. BACE Servs., Inc., a 2022 decision. In that case, because of concerns over binding a non-signatory that did not have “control or involvement in the contract’s origin or benefits,” the Fifth Circuit identified some limiting factors to be applied: a company could be closely related to a signatory when: “the non-signatory’s ownership of the signatory, its involvement in the negotiations, the relationship between the two parties[,]and whether the non-signatory received a direct benefit from the agreement.”

On appeal, the Sixth Circuit describes this test as “novel,” and in the majority opinion by Judge Batchelder walks through the origins of the closely-related doctrine, and its history and development. Noting that it often appears without much discussion or analysis, the Sixth Circuit describes it as “a federal common law rule of equitable contract interpretation that is best justified by its practical benefits (or policy purposes) and the fact that everyone else is doing it.”

Clarifying that no past Sixth Circuit opinion has adopted the doctrine, Judge Batchelder opines that “under federal common law…the ‘closely related’ doctrine should not survive as a stand-alone doctrine.” The concurrence declines to come down so hard, suggesting that state courts should be free if they wish to adopt some version of the doctrine. (It does seem to me, given well-established state law frameworks addressing non-signatory joinder, to adopt the closely-related doctrine at a state level may be redundant.)

It’s an excellent discussion and dialogue, and one I would commend to the reader. The closely-related doctrine continues to surface in both the arbitration context and in federal-court litigation, and a related choice-of-law question the Sixth Circuit discusses, concerning when to apply the state law of contract applicability to a forum selection clause, is the subject of a split among Circuit Courts of Appeal tracking that between the majority opinion in Firexo and the dissent; at some point, that split may well appear on the Supreme Court’s docket.

[The cases discussed are Firexo, Inc. v. Firexo Grp. Ltd., 2024 U.S. App. LEXIS 8873; 2024 Fed. App. 0084P ; __ F.4th __ (6th Cir., decided April 12, 2024) and Franlink Inc. v. BACE Servs., Inc., 50 F.4th 432, 436 (5th Cir. 2022).]