Seventh Circuit Clarifies Forum Selection Clause Applies Only To Contracting Parties
On August 7, 2023, the United States Court of Appeals for the Seventh Circuit reversed in part a decision by the Northern District of Illinois, holding that an agreed forum selection clause applies only to the parties to the agreement and cannot be invoked by a co-defendant that did not have a similar agreement. Nulogy Corp. v. Menasha Packaging Co., LLC, No. 22-1583, 2023 WL 5010784, at *1 (7th Cir. Aug. 7, 2023). The Court reviewed the district court’s threshold determinations regarding the forum selection clause de novo.
Nulogy Corporation alleged in its complaint that Menasha Packaging Company, LLC licensed one of Nulogy’s software products related to supply chain management. The license agreement included a forum selection clause providing that “The Parties will initiate any lawsuits in connection with the Agreement in Toronto, Ontario, Canada, and irrevocably attorn to the exclusive personal jurisdiction and venue of the courts sitting therein.” Years later, Deloitte Consulting LLP was helping Menasha review its systems and assist with better integrating Nulogy’s product. As part of that review, Deloitte and Menasha requested additional proprietary information from Nulogy, which Nulogy alleged was used to reverse engineer an alternative. Nulogy alleged that Menasha and Deloitte collaborated to misappropriate Nulogy’s proprietary information, and that Menasha breached its license agreement with Nulogy.
Nulogy first sued both Menasha and Deloitte in Canada for trade secret misappropriation but dismissed that suit and refiled in the United States after Deloitte challenged jurisdiction in Canada. Menasha then moved to dismiss the U.S. suit, in part on the grounds of forum non conveniens, arguing that Canada was the proper forum based on its forum selection clause in its license with Nulogy. The district court agreed and dismissed the entire complaint. Nulogy appealed, arguing that claims against both defendants were proper in the United States, and that at a minimum the claims against Deloitte should remain because of its previous challenge to the Canadian court’s jurisdiction.
The Seventh Circuit recognized that the district court faced “three unsatisfactory options”: 1) keep the claims and thus override a contractual bargain to litigate in Canada; 2) honor that forum selection clause and dismiss all claims, giving third-party Deloitte a benefit that it didn’t bargain for; or 3) dismiss only the claims against Menasha—but not Deloitte—potentially allowing for piecemeal litigation.
Although the district court had “understandable reasons” for choosing the second option, the Seventh Circuit preferred the third, holding that dismissing the claims against Menasha—but not Deloitte—was proper.
The Court first analyzed the claims against Menasha. It rejected Nulogy’s argument that its trade secret claims were unrelated to its agreement with Menasha and therefore the forum selection clause did not apply to its U.S. trade secret claims. To the contrary, the Court found that Nulogy’s complaint relied heavily on the contractual relationship and that any claims regarding misuse of information had a “strong connection to the agreement.” Satisfied that the clause applied, the Court determined that the clause was mandatory, not permissive, citing the forum selection clause requirement that the parties “will” initiate lawsuits in Toronto and “irrevocably attorn to the exclusive personal jurisdiction and venue of courts sitting therein.” The determination that the clause was mandatory altered the forum non conveniens analysis by shifting the burden to plaintiff to show transfer is unwarranted, excluding considerations of the parties’ arguments about their private interests, and excluding considerations of the original venue’s choice-of-law rules.
Nulogy argued that the district court erred by omitting the first step of the forum non conveniens analysis (determining availability and adequacy of an alternative forum) and that Canada was not available because Deloitte had not agreed that Canada was the proper forum. The Court rejected this argument, concluding that the naming of a defendant that was not a party to a forum selection clause does not upset the analysis with respect to claims against the party that is subject to the clause. The Court found Nulogy’s additional argument that dismissing claims against Menasha would raise piecemeal litigation concerns to be credible, but nevertheless held that it should not override the valid forum selection clause.
Turning to the claims against Deloitte, the Court refused to allow Deloitte the benefit of a forum selection clause for which it did not bargain, especially where it had already contested jurisdiction in Canada. Furthermore, Deloitte did not cite forum non conveniens as a reason for dismissal and the Court asserted that Deloitte should not prevail on an argument it has not raised.
Accordingly, the Court held that the claims against Menasha should be litigated in Canada while the claims against Deloitte should remain the United States, despite the hazard of piecemeal litigation. This case highlights the importance and strict enforceability of forum selection clauses. Special attention should be given to who is and is not bound by such clauses and the implications of such agreements on any future disputes.