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Pinto Technology Ventures, L.P. v. Sheldon

Supreme Court of Texas

May 19, 2017

Pinto Technology Ventures, L.P.; Pinto TV Annex Fund, L.P.; PTV Sciences II, L.P.; Rivervest Venture Fund I, L.P.; Rivervest Venture Fund II, L.P.; Rivervest Venture II (Ohio), L.P.; Bay City Capital Fund IV, L.P.; Bay City Capital Fund IV Co-Investment Fund, L.P.; Chris Owens; Bill Burke; Reese Terry; and Craig Walker, Petitioners,
Jeffery Sheldon and Andras Konya, M.D., Ph.D., Respondents

          Argued February 28, 2017

         On Petition for Review from the Court of Appeals for the Fourteenth District of Texas


          Eva M. Guzman Justice.

         Subject to public-policy constraints, forum-selection clauses are generally enforceable in Texas.[1] Though enforceability is not the concern it once was, [2] courts are frequently confronted with disagreements about the specific claims encompassed and the extent to which nonsignatories may resist or enforce such clauses. In determining these matters, common principles of contract and agency law[3] and the parties' chosen language are the fulcrum of our inquiry because forum-selection clauses are creatures of contract and we must give effect to the parties' intent as expressed in the four corners of the document.[4]

         Here, certain minority shareholders filed suit alleging dilution of equity interests and the defendants responded, in part, by invoking a forum-selection clause designating Delaware as the proper forum for "any dispute arising out of" a shareholders agreement. The parties ask us to decide (1) which parties are bound to the forum-selection clause as signatories or nonsignatories to the shareholders agreement and (2) whether statutory and common-law tort claims that are factually predicated on the existence or terms of that agreement must be litigated in the contractually designated forum. The trial court granted the defendants' motion to dismiss, but a divided court of appeals reversed, holding the forum-selection clause does not control because the shareholders' extracontractual claims do not allege noncompliance or interference with any rights or obligations derived from the shareholders agreement.[5]

         While "the party who brings a suit is master to decide what law he will rely on, "[6] whether a forum-selection clause applies depends on the factual allegations undergirding the party's claims rather than the legal causes of action asserted.[7] Focusing on the factual allegations in this case rather than the legal theories the minority shareholders elected to pursue, we hold that the shareholders' statutory and common-law tort claims evidence a "dispute arising out of" the shareholders agreement because (1) the existence or terms of the agreement are operative facts in the litigation and (2) "but for" that agreement the shareholders would not be aggrieved.[8] Our holding today is faithful to the parties' chosen contractual language, avoids "slavish adherence to a contract/tort distinction, "[9] and prevents litigants from avoiding a forum-selection clause with "artful pleading."[10] We further hold the shareholders are bound by the forum-selection clause as signatories to the shareholders agreement, except with respect to their claims against the nonsignatory defendants. We therefore reverse the court of appeals' judgment, render judgment dismissing the minority shareholders' claims in part, and remand the case to the trial court for further proceedings in part.

         I. Factual and Procedural Background

         Jeffery Sheldon and Andras Konya are shareholders in IDev Technologies, Inc. (IDEV), a developer and manufacturer of medical devices. Sheldon founded IDEV in 1999 and served as its Chief Executive Officer (CEO) until 2008. Konya, an IDEV consultant from 2002 to 2012, is the co-inventor of vascular-stent technology IDEV licensed in 2000. Both Sheldon and Konya initially acquired IDEV common stock through their business relationship with the company. Sheldon later added to his IDEV holdings by purchasing preferred stock.

         IDEV engaged in multiple rounds of financing, causing Sheldon's and Konya's proportional ownership interests to change over time. In early 2010, shortly before the events giving rise to the present dispute, Sheldon and Konya allege they owned 5% and 2.4% of IDEV's total outstanding shares, respectively. Following a series of transactions in 2010, however, Sheldon and Konya allege their interests were substantially and wrongfully diluted to a fraction of 1% in a concerted effort by certain controlling parties to wipe out common stockholders after first converting preferred stock to common stock. Sheldon and Konya contend the 2010 transactions manipulated, diluted, and devalued their holdings, depriving them of a significant payout in connection with IDEV's impending acquisition by another company at a considerable sum.

         Sheldon and Konya (collectively, the Shareholders) sued IDEV's venture-capital majority shareholders, [11] IDEV's CEO Chris Owens and Chief Financial Officer (CFO) Bill Burke, and IDEV directors Reese Terry and Craig Walker (collectively, the IDEV parties), alleging fraud, breach of fiduciary duty, minority-shareholder oppression, Texas Blue Sky Law violations, and conspiracy as to various parties. The IDEV parties moved to dismiss the claims based on a forum-selection clause in IDEV's 2010 Amended and Restated Shareholders Agreement (2010 Amended Shareholders Agreement), which plays a featured role in the allegations underlying the Shareholders' statutory and common-law tort claims. Sheldon and Konya contest the forum-selection clause's applicability to the dispute for a variety of reasons relating to the circumstances giving rise to the underlying dispute and amendment of the clause to change venue from Texas to Delaware.

A forum-selection clause has long been part of IDEV's shareholder agreements, as amended in 2002, 2004, 2006, 2008, and 2010. Both the 2002 and 2004 agreements included a forum-selection clause designating Harris County, Texas, as the forum for "any dispute arising out of" those agreements, but following an amendment in 2006, the shareholders agreement was revised to require litigation of disputes in Delaware:
[T]he Delaware state courts of Wilmington, Delaware (or, if there is exclusive federal jurisdiction, the United States District Court for the District of Delaware) shall have exclusive jurisdiction and venue over any dispute arising out of this Agreement, and the parties hereby consent to the jurisdiction of such courts.

         The 2008 and 2010 agreements carried forward the Delaware forum-selection clause without alteration.

         Sheldon signed all of the shareholder agreements, except the 2010 Amended Shareholders Agreement. Konya signed only the 2002 and 2004 shareholder agreements, but, notably, the 2004 agreement authorized written amendments with the assent of IDEV and a majority of the stockholders. Subsequent versions of the shareholders agreement also had provisions allowing for amendment on similar terms.

         The stated purpose of each amended shareholders agreement was to "promote the best interests" of IDEV and the "mutual interests" of the company and its shareholders by "imposing certain requirements with respect to the voting and transferability of the shares of [the company's stock] owned by the Shareholders." To that end, under the shareholders agreement, as amended from time to time, the shareholders and IDEV have certain rights and obligations that govern the relationship between them.

         Several of the amendments to the shareholders agreement coincided with financing required for IDEV's growth and solvency. Series A Financing in 2004 raised approximately $1.8 million; Series B in 2006 raised $24 million; and Series C in 2008 raised an additional $25 million. These transactions diluted the Shareholders' interests over time without any apparent dispute. However, dilution related to Series B-1 financing in 2010 and interconnected actions to amend the shareholders agreement precipitated Sheldon's and Konya's claims in the instant lawsuit. In addition to complaining about sundry actions permitted under the 2010 Amended Shareholders Agreement, the Shareholders allege:

• In 2010, the "Defendants set out to reduce [the Shareholders'] holdings . . . to a modest fraction of 1% and to similarly dilute other existing shareholders" employing "the following steps to accomplish their goal, " among others:
1. "The venture capital defendants . . . caused the board of directors to join with them to amend the Shareholder's Agreement, eliminating Sheldon['s] . . . preemptive rights"; and
2. "[The independent directors] Terry and Walker . . . went along with the various steps-including the amendment of the Shareholder Agreement-in breach of their fiduciary duties."
• "The Defendants caused the Shareholder Agreement to be amended in hopes of avoiding Sheldon's (and others') preemptive rights in respect of his common and preferred stock holdings."
• "[T]he 2010 Shareholder Agreement amendment was procured by fraud and breaches of fiduciary duty."
• "Defendants failed to disclose material facts to Sheldon related to the 2010 Shareholder Agreement amendment and related transactions."
• "Defendants may claim no rights under the 2010 Shareholder Agreement amendment as it is unenforceable under [the Blue Sky Law]."

         After considering the pleadings on file and the parties' arguments, the trial court granted the motion to dismiss in favor of a Delaware forum and dismissed the lawsuit with prejudice to refiling in Texas.

         In a split decision, the court of appeals reversed, holding the forum-selection clause inapplicable to this dispute because an "arising out of" forum-selection clause applies only when the claims would not exist "but for" the agreement containing the clause.[12] The court determined that the rights and obligations underlying the Shareholders' claims derive from statute and common law and, thus, do not "aris[e] out of" the 2010 Amended Shareholders Agreement.[13] Given its holding on the latter question, the court did not consider the Shareholders' additional arguments that, as nonsignatories, CEO Owens and CFO Burke lack enforcement capacity and that Konya is required to litigate only in Harris County, not Delaware.

         The dissenting justice assailed the majority's analysis as improperly "consider[ing] just the labels of the claims" instead of "focus[ing] on the substance of the claims."[14] And, more pointedly, the dissent took issue with the majority's application of an unduly conscribed causal-nexus standard that belies a "common-sense examination" of the claims' substance; permits artful pleading; and constrains "arising out of" language to only those disputes brought as breach-of-contract and tortious-interference claims.[15] Rejecting the majority's conclusion, the dissent found the forum-selection clause controlling because (1) the Shareholders' claims substantively pertain to dilution of Sheldon's and Konya's equity interests; (2) the shareholders agreement was amended "to enable that dilution and to protect the investors who acquired the newly issued stock"; and (3) the factual allegations relating to the dilution are "inextricably enmeshed" and "factually intertwined" with the agreement, surpassing the low "but for" connective threshold.[16]

         After an evenly divided en banc panel denied reconsideration, the IDEV parties appealed to this Court, arguing (1) the court of appeals applied an overly restrictive scope-of-coverage standard that necessarily excludes all statutory and common-law tort claims, which are always derived from extra-contractual rights and obligations; (2) a "common-sense examination" of the Shareholders' substantive allegations reveals this "dispute aris[es] out of" the 2010 Amended Shareholders Agreement; (3) Konya is contractually bound to subsequent contract amendments designating Delaware as the exclusive dispute-resolution forum; and (4) CEO Owens and CFO Burke can enforce the forum-selection clause as nonsignatories under the transaction-participant theory, [17] the substantially interdependent and concerted misconduct doctrine, [18] and the mandatory-venue provisions in Texas Civil Practice and Remedies Code sections 15.004 and 15.020.[19]

         In addition to echoing the court of appeals' analysis regarding the scope of the Delaware forum-selection clause, the Shareholders refute both its application as to Konya, because he only signed shareholder agreements designating a Texas forum, and its enforcement by Owens and Burke as nonsignatories under any of the asserted theories.

         II. Discussion

         A. Standard of Review

         Forum-selection clauses provide parties with an opportunity to contractually preselect the jurisdiction for dispute resolution.[20] In Texas, forum-selection clauses are generally enforceable[21]and "should be given full effect."[22] Failing to give effect to contractual forum-selection clauses and forcing a party to litigate in a forum other than the contractually chosen one amounts to "'clear harassment' . . . injecting inefficiency by enabling forum-shopping, wasting judicial resources, delaying adjudication on the merits, and skewing settlement dynamics . . . ."[23]

         Here, the parties agree the forum-selection clause is generally enforceable, but disagree about who may enforce it, who is bound by it, and whether the statutory and common-law tort claims alleged in this lawsuit constitute a "dispute arising out of" the 2010 Amended Shareholders Agreement. In considering these matters, we may seek guidance from federal law analyzing forum-selection clauses and draw analogies between forum-selection clauses and arbitration clauses, [24] which are "a specialized kind of forum-selection clause."[25]

         We begin our analysis by considering the scope of the forum-selection clause.

         B. The Claims Fall within the Scope of the Forum-Selection Clause

         Whether Sheldon and Konya's noncontractual claims fall within the forum-selection clause's scope depends on the parties' intent as expressed in their agreement and a "common-sense examination" of the substantive factual allegations.[26] Legal theories and causes of action are not controlling.[27] Rather, we avoid "slavish adherence to a contract/tort distinction, "[28] because doing otherwise "would allow a litigant to avoid a forum-selection clause with 'artful pleading.'"[29]

         The starting point of the inquiry is the forum-selection clause's language.[30] In this case, the parties agreed to resolve "any dispute arising out of this Agreement" in Delaware. Dictionaries define "arise" to mean "to originate from a specified source, "[31] "to stem (from), "[32] and "[t]o result (from)."[33] This Court has observed that the words "arising out of" have "broad[] significance, "[34] and we discern no significant limitation on their breadth from the language employed in the shareholders agreement.

         In the insurance context, we have described similar language as connoting "a causal connection or relation, "[35] concluding but-for causation is sufficient, even without direct or proximate causation.[36] A "but for" cause is one "without which the event could not have occurred."[37] In describing the temporal reach of but-for causation, we have repeatedly observed it "has in itself no limiting principle; it literally embraces every event that hindsight can logically identify in the causative chain."[38]

         Bearing these standards in mind, we previously applied the but-for causal standard to a forum-selection clause applicable to "any dispute arising out of" a distribution agreement in In re Lisa Laser USA, Inc., and concluded that a party's "claims arise out of the Agreement" when "but for the Agreement, [the party] would have no basis to complain."[39]

         Examining federal law for further guidance, we note that federal courts take a wide variety of approaches in interpreting "arising out of" or "arising under" forum-selection clauses, especially when determining whether such a clause extends to noncontractual claims.

         The Seventh Circuit, for example, has been openly critical of the but-for test:

But-for causation is an unsatisfactory understanding of language referring to "disputes arising out of" an agreement. Let us suppose that while inspecting Omron's facilities, a manager of Maclaren stepped on a baby rattle and fell. Would the ensuing tort litigation go to the High Court of Justice in the United Kingdom just because, but for the distribution agreement, none of Maclaren's employees would have been on Omron's premises? "Arising out of" and "arising under" are familiar phrases, and courts have resisted the siren call of collapsing them to but-for causation. An example: but for the existence of federal drug safety standards, it would not be possible to contend that noncompliance with the standards is tortious, but it does not follow that a tort suit "arises under" those standards and thus activates federal jurisdiction.[40]

         Faced with a forum-selection clause similar to the one in Lisa Laser, the Seventh Circuit ultimately concluded that "all disputes the resolution of which arguably depend on the construction of an agreement 'arise out of' that agreement."[41]

         The First Circuit has applied a "same operative facts" test, holding that "contract-related tort claims involving the same operative facts as a parallel claim for breach of contract should be heard in the forum selected by the contracting parties."[42] Federal courts in different jurisdictions, including Texas federal courts, have also found satisfaction of this test sufficient to invoke a contractual forum-selection clause.[43]

         Noting the absence of a specifically articulated test under Fifth Circuit jurisprudence, one federal district court recently opined that courts within that circuit generally consider (1) "whether the tort claims 'ultimately depend on the existence of a contractual relationship between the parties, '" (2) "whether 'resolution of the claims relates to interpretation of the contract, '" and (3) "whether the claims 'involv[e] the same operative facts as a parallel claim for breach of contract.'"[44]

         The court of appeals in this case took a much narrower approach, concluding a dispute arises out of a contract only when claims are based on the rights and duties established in the contract, regardless of whether the operative facts of the dispute involve the validity, terms, or performance of the agreement or have a substantial connection to it. When applied to the forum-selection clause in this case, however, an analytical construct that focuses only on the causes of action alleged and a hypothetical world where the agreement does not exist is inapt for several reasons.

         First, the contractual language at issue here uses the word "dispute"-defined as "[a] conflict or controversy, esp. one that has given rise to a particular lawsuit."[45] "Claim, " on the other hand, means "the assertion of an existing right" or "[a] demand for money, property, or a legal remedy to which one asserts a right."[46] When a forum-selection clause encompasses all "disputes" "arising out of" the agreement, instead of "claims, " its scope is necessarily broader than claims based solely on rights originating exclusively from the contract.[47]

         Second, the analysis the court of appeals applied encourages "artful pleading." A plaintiff could characterize its claim as a statutory or common-law tort claim to evade the agreed-upon forum despite essential allegations that are "inextricably enmeshed" or "factually intertwined" with the underlying contract.[48] In such cases, the forum-selection clause should be denied force only "if the facts alleged in support of the claim stand alone, are completely independent of the contract, and the claim could be maintained without reference to the contract."[49] "We cannot accept the invitation to reward attempts to evade enforcement of forum selection agreements through artful pleading of tort claims in the context of a contract dispute."[50]

         With this legal framework in mind, we turn to the factual allegations supporting the Shareholders' complaints to determine whether (1) the existence or terms of the 2010 Amended Shareholders Agreement are operative facts in the dispute and (2) "but for" that agreement the shareholders would not be aggrieved. Engaging in a common-sense examination of the substance of the claims made and the terms of the forum-selection clause, [51] we conclude the claims fall within the clause's scope. Reviewing the allegations in the live pleadings, the dispute substantively concerns (1) the elimination of preemptive rights and designated shareholder statuses, (2) the dilution of equity, (3) various misrepresentation or omissions of required disclosures, and (4) actions taken without notice as required by the shareholders agreement.[52]

         In examining these disputes, a but-for relationship between the disputes and the shareholders agreement is evident. First, the 2008 shareholders agreement granted Sheldon preemptive rights and designated Sheldon as a "Significant Shareholder" and both Sheldon and Konya as "Key Shareholders"; the 2010 Amended Shareholders Agreement eliminated those rights and designations; but for these agreements, no dispute about the loss of preemptive rights and designations would exist. Second, uncontroverted evidence reveals that IDEV could not have obtained essential financing without amending the shareholders agreement in 2010; without amending the shareholders agreement in 2010, dilution of equity would not have occurred as alleged; thus, the dispute over diluted equity would not exist but for the 2010 amendment. Third, the petition explicitly states that the IDEV parties "failed to disclose material facts to Sheldon related to the 2010 [Amended] Shareholder[s] Agreement"; since the facts allegedly withheld were related to the 2010 amendment, no dispute would exist but for the agreement.

         Additionally, we note that many of the statutory and common-law tort claims involve the same operative facts that would be implicated in a parallel breach-of-contract claim, had one been pursued. The shareholders agreement was designed to (1) protect the signatories from dilution, (2) grant them preemptive rights and shareholder-status designations, and (3) provide information rights and notice requirements. A contract claim or defense implicating these issues would involve the same operative facts as statutory and common-law tort claims addressing the same matters. Sheldon acknowledges this fact, stating "Sheldon chose, as was his right, not to seek a contractual remedy for violation of the preemptive right and of anti-dilution provisions of the shareholder agreements." Although Sheldon has that right, he cannot "evade enforcement of forum selection agreements through artful pleading of tort claims in the context of a contract dispute."[53]

         Sheldon and Konya's petition reveals the central role the shareholders agreement plays in their claims. Notably, the factual allegations giving rise to the noncontractual claims are integral to the dispute's resolution.[54] Even though shareholders and corporations can have relationships without an agreement like the one at issue here, we cannot ignore the reality that an agreement, in fact, governs their relationship and Sheldon's and Konya's alleged grievances emanate from the existence and operation of that agreement. So, while shareholders might be able to assert tortious-interference, breach-of-fiduciary-duty, and other noncontractual claims even without a shareholders agreement, [55]the allegations in this case invoke the 2010 Amended Shareholders Agreement as an integral part of Sheldon's and Konya's claimed injuries. The claims asserted ultimately, and actually, depend on the existence of the 2010 Amended Shareholders Agreement, resolution of the case involves the validity of that agreement, and the operative facts implicate the IDEV parties' authority to act pursuant to that agreement.

         For these reasons, we hold the dispute at issue arises out of the 2010 Amended Shareholders Agreement and therefore falls within the scope of the Delaware forum-selection clause. Our holding today is consistent with our precedent requiring that we focus on the substance of the claims, not the labels, and avoid "slavish adherence to a contract/tort distinction."[56] "To hold to the contrary ...

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