FRANLINK INCORPORATED, a Texas Corporation v. BACE SERVICES, INCORPORATED, a Florida Corporation, formerly known as CRAIG WELLS ENTERPRISES, INCORPORATED; STEVEN BRADLEY MORTON, a Florida Resident; PAYDAY SOLUTIONS, L.L.C., a Florida Limited Liability Company; JTL STAFFING; PAYROLL, L.L.C., an Alabama Limited Liability Company
No. 21-20316
United States Court of Appeals for the Fifth Circuit
September 28, 2022
FILED September 28, 2022 Lyle W. Cayce Clerk
Appeal from the United States District Court for the Southern District of Texas USDC No. 4:19-CV-4593
Before JOLLY, SMITH, and ENGELHARDT, Circuit Judges.
This case presents one primary question: whether non-signatories to a franchise agreement may be bound to the contract‘s choice of forum provision under the equitable doctrine that binds non-signatories who are “closely related” to the contract. We conclude such non-signatories may be bound to a forum selection clause, as we will more fully set out below. Applying the doctrine here, we affirm as to non-signatory PayDay, but reverse as to non-signatories JTL and Morton.
The other issues on appeal pertain to damages, attorneys’ fees, and costs. After this appeal, these awards only apply to the remaining defendants—the signatory,
We thus AFFIRM in part; REVERSE in part; VACATE in part; and REMAND.
I.
Amy and Craig Wells entered into a franchise agreement with Franlink Incorporated (“Link“) in 2007, which they renewed in 2017, allowing the Wellses to operate a franchise staffing company, BACE Services (“BACE“), in Jacksonville, Florida. The franchise agreement created a fee-sharing arrangement and authorized BACE to use Link‘s trademarks and name. It specified several acceptable reasons for terminating the franchise and outlined post-termination obligations. The agreement also included a covenant not to compete and a non-solicitation provision that applied to BACE, Craig Wells, and Amy Wells (collectively, “BACE defendants” or “signatories“).
By November 2018, BACE had become unhappy with the franchise arrangement and, according to the district court, “beg[a]n to explore options for exiting the Link Staffing system.” A ransomware attack in October 2019 on Link‘s system seemed to provide a reason, and BACE purported to terminate its agreement with Link on October 25, 2019.1 Earlier, on October 21, 2019, Bradley Morton—Amy Wells’ son and Craig Wells’ stepson, who had been a manager at BACE but not a signatory to the franchise agreement—had left BACE to become a branch manager at JTL, a competing staffing business that operates in the same territory as the BACE franchise. JTL is owned and operated by a non-party in this case. Still, Craig Wells began soliciting Link‘s former BACE clients to JTL on October 30, 2019.
Link soon learned of the activities involving JTL. Further, Link learned that Craig and Amy Wells were also operating another competing staffing company, PayDay, and were diverting and soliciting former Link clients to it. Such conduct led Link to formally terminate the franchise agreement on November 6, 2019. Additionally, on November 14, 2019, Link sent a cease and desist letter to JTL, which informed JTL of the BACE franchise agreement. JTL refused to comply with the cease and desist demand, saying it was not a signatory to the agreement.
On November 22, 2019, Link filed a complaint in the Southern District of Texas based on the forum selection provision of the franchise agreement.2 It named
The district court conducted a four-day bench trial in August 2020 and thereafter issued its findings of fact and conclusions of law. The district court granted each of Link‘s claims against the defendants and denied all the defendants’ counterclaims.
Specifically, the district court concluded that “Craig Wells, Amy Pope-Wells, and Morton operated their former Link Staffing Franchised Business and PayDay interchangeably, using the same employees, email addresses, and field staff while servicing the same customers. Additionally, they continue to operate PayDay interchangeably with JTL.” The district court cited evidence that Morton started working for JTL after having left his position at BACE, and that Morton had numerous correspondences with former BACE clients telling them that JTL was a “continuation” of BACE‘s Link franchise and that BACE would be doing business as JTL henceforth. The district court further concluded that JTL was a “mere continuation” of BACE‘s former Link franchise, and that it had conspired with BACE to operate a competing staffing company. Finally, the district court found that Craig and Amy Wells owned PayDay, a competing staffing company, which they had used to divert Link‘s former BACE clients and to compete with Link in the Jacksonville area.
At the conclusion of the four-day bench trial, the district court awarded Link $378,562.22 in damages for the losses suffered from the defendants’ breach of the contract. It also granted injunctive relief enforcing the non-compete and non-solicitation provisions. Link then moved for attorneys’ fees under the contract and the Lanham Act. The non-signatories again objected that the contractual attorneys’ fees provision did not apply to them because they were not parties to the agreement. The district court nevertheless awarded attorneys’ fees under the contract of $731,295.30 and costs of $113,484.04 and made all the defendants liable for the attorneys’ fees. The defendants unsuccessfully moved under
On appeal, the non-signatories challenge the district court‘s findings relating to personal jurisdiction, bifurcating the trial, and attorneys’ fees. They argue that, as non-signatories, they are not bound to the contract‘s forum selection clause, jury trial
II.
“The standard of review for a bench trial is well established: findings of fact are reviewed for clear error and legal issues are reviewed de novo.” Guzman v. Hacienda Recs. & Recording Studio, Inc., 808 F.3d 1031, 1036 (5th Cir. 2015). A trial judge‘s finding is only clearly erroneous if, after reviewing the entire record, the reviewing court “is left with the definite and firm conviction that a mistake has been committed.” Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)).
Matters of contract interpretation are reviewed de novo. Ergon-W. Virginia, Inc. v. Dynegy Mktg. & Trade, 706 F.3d 419, 424 (5th Cir. 2013). As are questions about personal jurisdiction and a party‘s entitlement to a jury trial. E. Concrete Materials, Inc. v. ACE Am. Ins. Co., 948 F.3d 289, 295 (5th Cir. 2020) (personal jurisdiction); U.S. Bank Nat. Ass‘n v. Verizon Commc‘ns, Inc., 761 F.3d 409, 416 (5th Cir. 2014) (jury trial). However, “[a]s for whether the district court properly refused to equitably enforce a contract, we review that for abuse of discretion.” Newman v. Plains All Am. Pipeline, L.P., 23 F.4th 393, 398 (5th Cir. 2022).
This court reviews a district court‘s ruling on a
III.
As noted, the principal question on appeal is whether the non-signatory defendants—Morton, JTL, and PayDay—can be bound, under the closely-related doctrine, to the forum selection clause in the franchise agreement between the BACE defendants and Link.4 We focus on the forum
The district court held that, under the closely-related doctrine, the non-signatories were “inextricably intertwined and closely related such that it is foreseeable they would be bound to the terms of the forum-selection clause.” This “closely-related” doctrine has “permitted non-signatories to an agreement to be bound by, and to enforce, forum selection clauses where, under the circumstances, the non-signatories enjoyed a sufficiently close nexus to the dispute or to another signatory such that it was foreseeable that they would be bound.” Fasano v. Li, No. 20-3131, 2022 WL 3692850, at *11 (2d Cir. Aug. 26, 2022); see also Stellar Restoration Servs. v. Courtney, 533 F. Supp. 3d 394, 424 (E.D. Tex. 2021) (stating that the closely-related doctrine may also be established if the non-signatory‘s conduct is “‘closely related’ to the contractual relationship“).
Our court has never recognized the closely-related doctrine. All other circuit courts to have considered the doctrine, however, have recognized it in one way or another. See In re McGraw-Hill Glob. Educ. Holdings LLC, 909 F.3d 48, 63 (3d Cir. 2018); Magi XXI, Inc. v. Stato della Citta del Vaticano, 714 F.3d 714, 723 (2d Cir. 2013); Marano, 254 F.3d at 757–58 (8th Cir.); Lipcon v. Underwriters at Lloyd‘s, London, 148 F.3d 1285, 1299 (11th Cir. 1998); Baker v. LeBoeuf, Lamb, Leiby & Macrae, 105 F.3d 1102, 1106 (6th Cir. 1997); Hugel v. Corp. of Lloyd‘s, 999 F.2d 206, 209–10 (7th Cir. 1993); Manetti-Farrow, Inc. v. Gucci Am., Inc., 858 F.2d 509, 514 n.5 (9th Cir. 1988). Link asks us to join these circuits.
A.
Although most circuits have adopted the closely-related doctrine, they have usually done so without in-depth explanation of the theory. See, e.g., Marano, 254 F.3d at 757–58 (finding a plaintiff closely related when he was “a shareholder, officer, and director” of a signatory); Hugel, 999 F.2d at 209–10 (concluding that two plaintiffs were closely related because a signatory was “President and Chairman of the Board” of the plaintiffs and owned almost all of the plaintiffs’ stock); Manetti-Farrow, 858 F.2d at 514 n. 5 (writing, in three-sentence footnote, that multiple defendants were closely related). The Seventh and the Third Circuits, however, have made an effort to more fully explain the doctrine and to indicate its proper employment.
The Seventh Circuit addressed the closely-related theory in Adams v. Raintree Vacation Exch., LLC, 702 F.3d 436 (7th Cir. 2012) (Posner, J.). The court gave three reasons why allowing closely-related non-signatories to invoke a forum selection clause is an appropriate equitable theory. First, without such a principle, forum selection clauses could “easily be evaded.” Id. at 441; see also Fitness Together Franchise, LLC v. EM Fitness, LLC, No. 1:20-cv-02757-DDD-STV, 2020 WL 6119470, at *4 (D. Colo. Oct. 16, 2020) (describing a benefit of the theory as preventing “parties to contracts from using evasive, formalistic means lacking economic substance to escape contractual obligations” (citations and quotations omitted)). Second, forbidding non-signatories to invoke, or to be bound, to these clauses would “undermine the contribution that [forum selection] clauses have been praised for“—providing
The Seventh Circuit, in its words, “decomposed” the closely-related doctrine‘s admittedly “vague standard” “into two reasonably precise principles“—affiliation and mutuality. Id. at 439. The court defined affiliation as “common ownership.” Id. It noted, however, that common ownership alone is insufficient for “a nonparty to a contract to be able to invoke, or be bound by, a clause in [the contract].” Id. at 440. In defining the principal of mutuality, the court relied on the agency concept of “secret principals.” Id. at 442.
The Third Circuit, on the other hand, basically adopts the Delaware Chancery Court‘s factors for determining whether a non-signatory is so “closely related” as to be bound to a contract‘s forum selection clause.6 McGraw-Hill, 909 F.3d at 62–63. These factors include: “[T]he 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.” Id. at 63 (determining that without control or involvement in the contract‘s origin or benefits there is “precious little basis for applying the closely related parties doctrine“). Additionally, the Third Circuit concluded that “a foreseeability finding in the context of forum selection clauses must have some evidentiary basis, other than pure speculation, that the party sought to be bound had an awareness of the clause, its contents, and that it might be defensively invoked.” Id. at 65 (emphasis added).
In sum, the Seventh and Third Circuits, in giving some structure to the closely-related doctrine‘s “vague standard,” have considered: common ownership, involvement in the agreement‘s negotiations, signatory status of the party opposing the forum selection clause, the type of claims and allegations at issue, control by secret principals, the posture of the case, direct benefits received, and awareness of the agreement and its relevant terms. Other circuits in their brief assessments have considered similar factors. See, e.g., Magi, 714 F.3d at 723 (holding that a party was closely related on account of approval rights over the contractual content, awareness of the designated forum, and involvement in breach of contract); Marano, 254 F.3d at 757–58 (finding a plaintiff to be closely related because (1) he was “a shareholder, officer, and director” of a signatory, and (2) he brought suit under the agreements in question alongside other signatories); Hugel, 999 F.2d at 210 (emphasizing a signatory‘s control over two plaintiffs both financially, through stock ownership, and by being “President and Chairman of the Board” when assessing if the two plaintiffs were closely related). It does appear that the various factors relevant in these respective cases have been considered holistically with no particular test emerging as definitive.
B.
Notwithstanding its recognition by federal courts, however, the closely-related
Legal academics have also raised concerns with the “closely-related” doctrine. The absence of the non-signatory‘s consent presents a due process problem by forcing a party to litigate in a forum that would otherwise lack personal jurisdiction. John F. Coyle & Robin J. Effron, Forum Selection Clauses, Non-Signatories, and Personal Jurisdiction, 97 NOTRE DAME L. REV. 187, 213 (2021) (“[T]he closely-related-and-foreseeable test to assert personal jurisdiction over non-signatory defendants is impossible to reconcile with recent Supreme Court precedents relating to personal jurisdiction with respect to out-of-state-defendants.“). As an alternative to the closely-related doctrine, these professors suggest that “[w]here the ‘close relationship’ is one in which the non-signatory is working functions more or less as a unit with the signatory, the relationship should be expressed and analyzed using the more familiar tools of agency, third-party beneficiary law, and equitable estoppel.” Id. at 224.
C.
Although there is good reason to be dubious of the doctrine, the fact that it has been recognized by all other circuits to have considered it, invokes a strong reason for us to apply it in this circuit. We, as a court, “are always chary to create a circuit split[.]” Gahagan v. United States Citizenship & Immigr. Servs., 911 F.3d 298, 304 (5th Cir. 2018) (quoting United States v. Graves, 908 F.3d 137, 142 (5th Cir. 2018)); see also United States v. Thomas, 939 F.3d 1121, 1130 (10th Cir. 2019) (“We should not create a circuit split merely because we think the contrary arguments are marginally better.“). Further, we must acknowledge that the doctrine can serve a purpose in producing equitable results, as earlier noted. Thus, prudence and judicial modesty caution against singularly swimming against this tide of authority. Accordingly, we turn first to give articulation of the doctrine as applicable here; and then to apply it to each of the non-signatories, Morton, JTL, and PayDay.7
IV.
We repeat once again that for the doctrine to bind a non-signatory to a forum selection clause, first, “the party must be ‘closely related’ to the dispute such that it becomes ‘foreseeable’ that it will be bound.” Hugel, 999 F.2d at 209 (citing Manetti-Farrow, 858 F.2d at 514 n.5). What remains, however, is filling in the blanks. Borrowing from the precedents,
A.
We will begin with Morton, who is certainly related to the Wellses in a personal sense, as their son/stepson. That relationship, in and of itself, however, is not a factor in establishing liability here. Indeed, Morton does not satisfy any of the factors that we have identified under the closely-related doctrine. First, Morton was not an owner of the franchisee, BACE, but was only an employee. Second, although Morton‘s employment with BACE allowed him to create and develop client relationships—which he apparently used in his subsequent employment by JTL—this benefit arose from his employment relationship with BACE, and does not constitute a direct benefit from the contract itself. Finally, there is no evidence that Morton was aware of the franchise agreement‘s forum selection clause. See McGraw-Hill, 909 F.3d at 65. The cease and desist letter sent to JTL after Morton had begun to work for JTL did not contain all the terms of the agreement and did not mention the forum selection clause specifically. Thus, there is no “evidentiary basis” that Morton had “an awareness of the [forum selection] clause, its contents, [or] that it might be defensively invoked.” Id. Accordingly, we hold that the closely-related doctrine does not bind Morton to the forum selection clause of the franchise agreement. It follows that the district court lacked personal jurisdiction over Morton, and the entire judgment is reversed and vacated as to him.
B.
Neither can JTL be bound to the forum selection clause under the closely-related doctrine. First, JTL had no ownership interest in BACE, nor vice versa—JTL is fully owned by a non-party in this case. Second, JTL received no direct benefit from the Link franchise contract. To the extent that JTL may have benefited from Morton‘s work with the Link clients, the benefit is attenuated and not—as required—a direct benefit arising from the BACE/Link contract itself. Finally, the record does not reflect that JTL was aware of the forum selection clause, given that its only notice of the franchise agreement was the cease and desist letter—which,
C.
We now turn to PayDay. We conclude that PayDay is bound to the franchise agreement‘s forum selection clause under the closely-related doctrine. First, PayDay, like BACE, is fully owned and operated by the Wellses, who are signatories to the BACE/Link franchise agreement. We reiterate that common ownership between signatory BACE and non-signatory PayDay is a key factor supporting the application of the closely-related doctrine here. See, e.g., Adams, 702 F.3d at 439–40; McGraw-Hill, 909 F.3d at 63; Marano, 254 F.3d at 757; Hugel, 999 F.2d at 209–10. Second, PayDay received a direct benefit from the BACE contract. As owners, the Wellses, obviously, enjoyed a direct economic benefit under the contract with Link and transferred, at least in part, this contractual benefit to PayDay, their wholly owned company. See, e.g., Weatherford Int‘l, LLC v. Binstock, 452 F. Supp. 3d 561, 571–72 (S.D. Tex. 2020) (non-signatories who were owned by the same entity as a signatory and who were used to circumvent the agreement were “closely related“). Third, PayDay, through its full owners and operators, the Wellses, was aware of the BACE and Link franchise‘s terms, including the forum selection clause. PayDay meets the requirements of being closely related and, accordingly, is liable under the franchise agreement.
D.
In sum, the closely-related doctrine does not bind Morton or JTL to the BACE/Link contract‘s forum selection clause and, consequently, the judgment as to each of them is reversed and vacated for lack of personal jurisdiction.9 The district court had jurisdiction over PayDay. The
V.
We now turn to the remaining issues: damages, fees, and costs awarded to Link. The district court awarded Link $378,562.22 in damages for the breach of contract. It also granted Link an injunction enforcing the non-compete and non-solicitation provisions. Following Link‘s motion, the district court additionally granted Link $731,295.30 in attorneys’ fees and $113,484.04 in costs.
The defendants now remaining after this appeal, BACE10 and PayDay, appeal these awards, contending that the district court erred in (A) calculating the contractual damages owed, (B) awarding both future damages and injunctive relief, and (C) determining the proper amount of attorneys’ fees and costs.11 We agree, and accordingly reverse and remand.
A.
With respect to damages, BACE and PayDay only specifically appeal the $34,633.22 awarded to Link for lost revenue damages relating to a client invoice. Under the contract, BACE owed Link a percentage of all income received from its clients, which would include a percentage of a $34,633.22 invoice sent to a BACE client. BACE apparently never paid Link its percentage of this amount under the contract and, therefore, the district court correctly concluded that defendants owed Link at least some part of the $34,633.22 invoice. BACE and PayDay correctly note, however, that the franchise agreement only entitled Link to a percentage of the receivable, which the district court even acknowledged at trial. Awarding the full amount was, therefore, an erroneous calculation of the damages owed under the contract that warrants reversal and remand for reconsideration.
B.
PayDay and BACE also challenge the district court‘s award of both future damages and injunctive relief as being duplicative. The district court awarded future damages of $147,900.00 and an injunction that enforced the “non-compete and non-solicitation provisions [against all the defendants] . . . for a two-year period, starting from the effective date of the termination of the Franchise Agreement, November 6, 2019.”
In Texas, it “is a rule of general application” that “future damages cannot be recovered if a permanent injunction issues . . . .” Schneider Nat. Carriers, Inc. v. Bates, 147 S.W.3d 264, 285 (Tex. 2004), modified on other grounds, Gilbert Wheeler, Inc. v. Enbridge Pipelines (E. Texas), LP, 449 S.W.3d 474 (Tex. 2014); Eberts v. Businesspeople Pers. Servs., Inc., 620 S.W.2d 861, 864 (Tex. Civ. App. 1981) (applying the general rule in a case involving a non-compete covenant). Link has cited no evidence that it would sustain separate future damages with an enforced injunction in place. Thereby, Schneider‘s general rule controls—the $147,900.00 award of future damages is reversed and vacated. The injunction remains unaffected and is otherwise affirmed.
Finally, BACE and PayDay appeal the calculation of the attorneys’ fees awarded to Link because the district court did not sufficiently assess one factor—the amount involved and the results obtained—in determining if an adjustment of the fee awarded was appropriate. They also challenge the costs awarded. In this opinion, we have reversed the district court‘s judgment with respect to two of the non-signatory defendants, JTL and Morton. We have also reversed and vacated a substantial portion of the damages awarded. Thus, the facts underlying district court‘s assessment of the factor at issue—i.e., the results obtained by those attorneys—have significantly changed. These rulings raise questions of the appropriate amount of attorneys’ fees and costs. We therefore vacate the award of attorneys’ fees and costs, and remand for reconsideration in the light of this opinion.
VI.
Summing up, in this opinion, we have:
- held that the closely-related doctrine may under limited circumstances bind non-signatories to a contract‘s forum selection clause;
- held that the closely-related doctrine does indeed bind non-signatory PayDay to the franchise agreement, but does not bind non-signatories Morton or JTL;
- reversed the district court‘s denial of the motion to dismiss for lack of personal jurisdiction as to Morton and JTL, and vacated the judgment in its entirety against Morton and JTL;
- affirmed the district court judgment that PayDay is liable under the contract, and therefore properly subject to the imposed injunction and liable for actual damages, attorneys’ fees, and costs as to be recalculated on remand not inconsistent with this opinion;
- remanded for recalculation of the proper amount of damages owed as it pertains to the $34,633.22 client invoice;
- reversed and vacated the district court‘s award of future damages in the amount of $147,900.00;
- reversed and vacated the amount of attorneys’ fees and costs awarded to Link, and remanded for reconsideration in the light of this opinion;
- affirmed the actual damages awarded in the amount of $196,029.00, as well as the injunctive relief imposed on BACE and PayDay.
AFFIRMED in part; REVERSED in part; VACATE in part; and REMANDED.
Notes
Following these lines, the clause returned to standard typeface and stated that “FRANCHISEE acknowledges and agrees that this Section shall survive the termination or expiration of this Agreement.”Franchisee and its owners agree that Link may institute any action against Franchisee or its owners in any state or federal court of general jurisdiction in (a) the State of Texas, or (b) in the state where Franchisee has its principal place of business, or (c) within such state and in the judicial district in which Link has its principal place of business at the time the action is commenced, and Franchisee (and each owner) irrevocably submits to the jurisdiction of such courts and waives any objection Franchisee (or such owner) may have to either jurisdiction or venue in such courts. Nonetheless, Franchisee and its owners agree that Link may enforce this agreement in the courts of the State of Texas.
Link also contends that the Texas district court had personal jurisdiction over the non-signatories because they purposefully availed themselves of the Texas courts. Link cites the Supreme Court‘s recognition that personal jurisdiction may arise in a forum which is “the focal point of the [injurious action] and the harm suffered.” Calder v. Jones, 465 U.S. 783, 789 (1984). Calder does not apply here, however, because the non-signatories’ injurious action—the competition and solicitation activities—and the harm felt by Link were all directed in Florida, not Texas. The mere fact that Link is a Texas corporation injured by the non-signatories’ actions is insufficient, without other evidence, that the non-signatories had sufficient contact with Texas. Consequently, the non-signatories did not have sufficient minimum contacts to establish personal jurisdiction on this basis.