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Court Addresses Related Agreements with Forum Selection Clauses that Designate Different Venues for Dispute Resolution

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  • Posted on: Jun 5 2019

A forum selection clause is contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract imaginable, e.g., employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown foreign judges and/or juries.

Under New York law, “a contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 321l(a)(l).” Landmark Ventures, Inc. v. Birger, 147 A.D.3d 497, 497 (1st Dept. 2017); see Lifetime Brands, Inc. v. Garden Ridge, L.P., 105 A.D.3d 1011, 1012 (2d Dept. 2013) (affirming dismissal “pursuant to CPLR 3211 (a) (1) on the ground that the forum selection clause precluded commencement of the action in New York”). It is “prima facie valid and enforceable” unless the challenging party can show the forum selection clause “to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching,” or “that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.” Molino v. Sagamore, 105 A.D.3d 922, 923 (2d Dept. 2013) (citation and internal quotation omitted).

Forum selection clauses can be mandatory or permissive. The former requires the dispute to be litigated only in the designated venue, while the latter permits litigation in a particular venue but does not prohibit it in another jurisdiction.

In interpreting forum selection clauses, courts apply the principles of contract construction. Such construction can be challenging where, as in Lilis Energy, Inc. v. Blackwell, 2019 N.Y. Slip Op. 31523(U) (Sup. Ct., N.Y. County May 29, 2019) (here), there are related agreements with forum selection clauses that designate different venues for dispute resolution.

Lilis Energy, Inc. v. Blackwell

Background

Lilis involved an effort by plaintiff, Lilis Energy, Inc. (“Lilis”), to claw back certain stock and stock options that it awarded to Seth Blackwell (“Blackwell”), a former employee of the company, on the grounds that Blackwell had been fired for cause and, therefore, was not entitled to retain the securities. Blackwell sued Lilis in Texas state court, asserting that Lilis breached an employment agreement it had with him because it required “any dispute that arises directly or indirectly from the relationship of the Parties evidenced by [the] Agreement” to be litigated exclusively in Texas. Id. Lilis argued that “a nearly identical forum selection clause in the contracts governing Blackwell’s stock and stock option awards require[d] that the dispute be heard in New York.” Id.

Lilis is an independent oil and gas company headquartered in Houston, Texas. It hired Blackwell as its Executive Vice President of Land and Business Development on December 1, 2016. In connection with his hiring, Blackwell entered into an Executive Employment Agreement (the “Employment Agreement”), which outlined Lilis’s policies on, among other things, compensation, bonuses, and severance payments.

Under the Employment Agreement, Blackwell was eligible to receive, among other incentives and benefits, bonuses and awards of equity and non-equity compensation from the company. The Employment Agreement also included detailed definitions of key terms related to Blackwell’s employment, including termination for “Cause.”

In addition, the Employment Agreement contained a broadly worded forum selection clause which directed Lilis and Blackwell to litigate any disputes arising from the employment relationship in the State of Texas:

For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of Texas and agree that any related litigation shall be conducted solely in the courts of Harris County, Texas or the federal courts for the United States for the Southern District of Texas, where this Agreement is made and/or to be performed, and no other courts.

Id. at *2.

In accordance with the Employment Agreement, Lilis granted Blackwell a series of equity awards, documented in certain stock and stock option agreements (collectively, the “Award Agreements”). The Award Agreements provided that if Blackwell was fired by the company “for Cause,” his stock options would immediately expire, and his unvested stock would immediately be forfeited. If Blackwell left the company for other reasons, he could be entitled to keep some, if not all, of his stock options and unvested stock.

The Award Agreements, like the Employment Agreement, contained a forum selection clause. The clause identified New York, not Texas, as the forum for any disputes related to the “relationship of the parties evidenced by the Award Agreement”:

For purposes of resolving any dispute that arises directly or indirectly from the relationship of the parties evidenced by the Award Agreement, the Grantee hereby submits to and consents to the exclusive jurisdiction of the State of New York and agrees that any related litigation shall be conducted solely in the courts of New York County, New York or the federal courts for the United States for the Southern District of New York, where the Award Agreement is made and/or to be performed, and no other courts.

Id. at *4.

According to the complaint, Blackwell was fired from his employment at Lilis on April 3, 2018, in the wake of allegations of impropriety. The company claimed that Blackwell was fired “for Cause,” as defined in the Employment Agreement; Blackwell disagreed with that assertion.

The “parties vigorously dispute[d] the proper forum to hear th[e] case.” Id.  According to Blackwell, the dispute should be litigated in Texas under the forum selection clause found in the Employment Agreement. To underscore this point, Blackwell filed a lawsuit in Texas state court on June 21, 2018, “alleg[ing] that Lilis breached the contract because he was not terminated for Cause under his Employment Agreement.” Id. A few weeks later, on July 10, 2018, Lilis filed the New York action, relying on the forum selection clause in the Award Agreements. Id. at **4-5.

Lilis alleged that Blackwell breached his fiduciary duty to the company, and sought declaratory relief, which would amount to a ruling that Blackwell was terminated for Cause and thereby surrendered his rights to certain awards, bonuses, and severance payments.

Blackwell moved to dismiss Lilis’s complaint on the ground that the forum selection clause in the Employment Agreement controlled, and thus Texas was the appropriate forum for the dispute. Alternatively, Blackwell argued, the action should be dismissed under the doctrine of forum non conveniens (CPLR § 327(a)(4)), or in light of the first-filed Texas action (CPLR § 321l(a)(4)).

The Court’s Decision

“The first order of business,” noted the Court, was “to decide which forum selection clause applie[d] to Plaintiff’s claims.” Slip Op. at **5-6 (internal quotation marks omitted, quoting   Encompass Aviation, LLC v. Surf Air Inc., No. 18 CIV. 5530 (CM), 2018 WL 6713138, at *7 (S.D.N.Y. Nov. 30, 2018)). See also DeSola Grp., Inc. v. Coors Brewing Co., 199 A.D.2d 141, 141 (1st Dept. 1993) (“[F]orum selection clause is inapplicable since plaintiff’s complaint does not pertain to the Agreement”); Schmelkin v. Garfield, 85 A.D.3d 755, 755-56 (2d Dept. 2011) (holding that the defendant “failed to sustain his burden of establishing that the forum selection clause applies here, since the allegations in the complaint are not based on” the relevant agreement).

The Court found that “Blackwell’s eligibility to receive any of the compensation at issue originate[d] in the Employment Agreement.” Slip Op. at *6. Thus, held the Court, the dispute “hinge[d] on the Employment Agreement, not the Award Agreements.” Id.

To underscore this holding, the Court explained that the claims for declaratory relief largely depended “on whether Blackwell was validly fired ‘for Cause’ – a term defined in the Employment Agreement.” Id. Lilis’s breach of fiduciary duty claims also “stem[med] directly from the Employment Agreement.” Indeed, noted the Court, Lilis acknowledged that Blackwell owed such duties only “by virtue of his role as an executive officer and employee of” the company, “a role defined by the Employment Agreement” and admitted that “whether Blackwell’s incentive stock options … accelerated and became immediately exercisable or expired as of the date of Blackwell’s termination [was] entirely dependent on whether or not he was terminated for ‘Cause,’ as solely defined in his Employment Agreement.” Id. at *7. In fact, Lilis even argued that there was “no dispute that Blackwell received the equity awards at issue solely as a result of his employment relationship with Lilis.” Id.

The Court rejected Lilis’s argument “that the Award Agreements’ forum selection clause envelop[ed] all disputes relating to the Award Agreements as well as all disputes relating to an awardee’s Employment Agreement.” Id. Such a reading, noted the Court, constituted “a remarkable rewriting of the agreements, and as a matter of contract interpretation” was “untenable.” Id.

The Court sharply criticized the company for advancing an interpretation that produced “impractical, if not absurd, results.” Id.

Lilis’s Texas-based employees seeking to litigate disputes with the company about disability benefits, vacation days, or the non-compete policy – found in the Employment Agreement …, respectively – would be forced to do so in New York simply because they signed a separate agreement concerning an entirely different aspect of employment. Nothing in the text of the Award Agreements’ forum selection clause suggests such all-encompassing breadth.

Id. at **8-9.

The Court went on to say that “Lilis’s interpretation would read the forum selection clause out of the Employment Agreement altogether.” Slip Op. at *7. Such a result “runs afoul of the general rule that ‘[w]here interrelated agreements contain competing forum selection clauses, a Court must avoid [an] interpretation[ ] that render[s] a provision of either agreement superfluous.’” Id. at **7-8, quoting Adar Bays, LLC v. Aim Expl., Inc., 251 F. Supp. 3d 704, 708 (S.D.N.Y. 2017) (internal quotation marks omitted). Yet, found the Court “Lilis’s reading [did] exactly that.” Id. at *8.

The Court also rejected Lilis’s argument that the Award Agreements superseded the Employment Agreement such that the forum selection clause in the former controlled the matter. Id. at *9. Although the Award Agreements were executed after the Employment Agreement, the substance of the agreements was different; thus, the forum selection clause in the Award Agreements could not control. Id., citing Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc., 165 A.D.3d 413, 413-14 (1st Dept. 2018); Kramer v. Danalis, 49 A.D.3d 263, 264 (1st Dept. 2008). Indeed, noted the Court, “the Employment Agreement addresse[d] an employee’s entitlement to compensation, including the award of stock options, while the Award Agreements address[ed] the specifics of those options.” Id.  Since the “dispute between Blackwell and Lilis was about Blackwell’s entitlement to the incentive awards and other compensation, not about the specifics of the options” the forum selection clause in the Employment Agreement controlled.

Accordingly, the Court granted Blackwell’s motion to dismiss and dismissed Lilis’s complaint.

Takeaway

As discussed above, Court determined that the dispute between the parties was about the Employment Agreement, not the Award Agreements. “Either Blackwell was fired for Cause under the Employment Agreement, or he was not. Once that fundamental determination is made, the consequences [e.g., application of the forum selection clause] will then inexorably ripple out to the Award Agreements.” Slip Op. at *8. “In other words,” said the Court, “[i]t is the Employment Agreement, which will work its effect on the Award Agreements, not vice versa.” Id.  Lilis is, therefore, a good example of a court “[a]pplying well-worn canons of [contract] construction” to determine how two related agreements could be “read to govern separate, albeit related, areas of potential discord.” Slip Op. at *8.

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