In a case arising from the Covid-19 pandemic, the Beaumont Court of Appeals has reversed a trial court’s denial of the special appearance of a California business and its CEO.
The dispute in TBS Business Solutions USA, Inc. and Tewodros “Teddy” Sahilu v. Allco, LLC (No. 09-21-00146) involved an unfulfilled order for a million N95 masks manufactured by the 3M Company. Allco ordered the masks from the Texas-based company Global Management Services, a medical distributor. Allco paid a deposit of $870,000 toward the $2.9 million cost of the order. Global, however, did not have the masks on hand, so it ordered them from TBS, a California company authorized to distribute the masks. Global’s order was for 5.6 million masks at a purchase price of more than $5.4 million. Global wired the cash to TBS, only to be informed that TBS did not have any masks either. TBS sought to fill Global’s order through another supplier, Makrite Industries, though their N95 masks cost three times more than 3M’s. Global thus ordered the million masks it owed Allco from Makrite at a cost of $2.85 million. TBS got the masks, shipped them to Global, and credited the $2.85 million against the $5.4 million Global previously paid. The problem was, Allco never got them, and Global refused to refund their money. Allco sued Global and its president and TBS and its CEO on common law fraud, fraud by nondisclosure, conversion, statutory theft, breach of contract, promissory estoppel, quantum meruit, vicarious liability, and civil conspiracy.
Global and its president did not file answers, so Allco defaulted them. TBS and its CEO did appear and filed a special appearance and answer. In an unsworn declaration signed by the CEO, TBS and the CEO argued that they were not Texas residents, TBS was incorporated and had its principal place of business in California, and TBS had a contract with Global, not Allco. Allco argued that the trial court had jurisdiction because TBS had actual knowledge the masks were for Allco, that Global was a Texas distributor, and that it would not offend traditional notions of fair play for the court to exercise jurisdiction. The trial court agreed and denied the special appearance. TBS and the CEO appealed.
The question before the court of appeals was whether the defendants had sufficient minimum contacts with Texas to establish specific jurisdiction over them. To determine this question, the court must find that the defendants’ litigation-related conduct creates a substantial connection with the forum state and that defendants “purposefully availed” themselves of Texas law. Here the court found that Allco did not establish purposeful availment so that it would not offend traditional notions of fair play to subject the defendants to the jurisdiction of a Texas court. First, Allco had no direct business relationship or other contact with TBS or its CEO with respect to the masks. Second, all of the defendants’ dealings with Global were conducted from California by phone or email. Third, TBS’s contract with Global did not represent that TBS actually had masks on hand but that supplies would necessarily fluctuate due to high demand, contrary to Allco’s allegation that TBS misrepresented the facts to the contrary. Allco’s allegations of fraud thus did not “affirmatively demonstrate how TBS or [its CEO] did business or committed a tort in Texas.” Fourth, Global “reached into California by ordering face masks under an order requiring TBS to ship the masks to it by common ground carrier so that Global could then use the masks in its business to fulfill its own agreements with its customers.” Had it delivered the masks, TBS would simply have handed them over to a common carrier in California and never performed any part of the work in Texas.
The court concluded that Allco had no purposeful contacts with Texas. The trial court erroneously relied on the “directed tort and effects test, both of which tests have been rejected by the Texas Supreme Court.” The mere knowledge that the products would end up in Texas, without more, does not support the trial court’s specific jurisdiction. “Examples of conduct that show a nonresident purposefully availed itself of a benefit or advantage in the forum where the suit was filed,” the court observed, “include: (1) designing a product for the market in the forum; (2) advertising for business in the forum; (3) establishing channels for providing its customers with regular advice in the forum; and (4) marketing products through a distributor who serves as the nonresident’s sales agent in the forum.” The defendants did none of these things. Instead, the trial court focused solely on Global’s unilateral activities, not those of the defendants. The court thus ordered the trial court to sever the defendants’ claims from those against any other parties and dismiss them from the suit.
Unfortunately for Allco (a construction company located in Beaumont), Global forfeited its existence in August 2021 and dissolved. That explains the default and why TBS and its CEO were even in the lawsuit. The company now finds itself out $870,000 with no way of getting it back (a fact that may have contributed to the trial court’s willingness to exercise jurisdiction). Still, it’s hard to argue with the court of appeals’ thorough and well-supported opinion.
