Another Worrisome Piercing Case

This time it's the US District Court for the Southern District of Georgia that is the culprit.  Let's hope the context of this ruling is important.  The issue was one of venue, not liability.  Here are the relevant facts.

Rayonier Wood Products bought a lumber grading system from ScanWare. FinScan, a Finnish company, was not a party to the contract  and at the time was only a minority owner of ScanWare.  About 15 months later FinScan acquired 100% of the stock of ScanWare. 

As you might imagine, Rayonier was not happy with the performance of the grading system and sued ScanWare and FinScan.  Because the contract between Raynoier and ScanWare contained a choice of law provision, Rayonier filed the action in Georgia.  I'm going to skip over the procedural details to tell you simply that there was a dispute over the proper venue for the case and the question came down to whether FinScan was bound by the choice of law provision in a contract it didn't sign and at a time when it was only a minority shareholder to one of the signatories.  Of course, I wouldn't be writing this if the answer was anything but YES.

The court in Rayonier Wood Products. LLC v. ScanWare, Inc.,2009 U.S. Dist. LEXIS 110753 (Ga., 11/30/09) gave short thrift to the fact that at the time of the contract FinScan was just a minority shareholder.  What the court found dispositive instead were these facts:

1. FinScan later became the sole shareholder of ScanWare;

2. Rayonier and FinScan employees regularly communicated with each other (presumably regarding ScanWare business, but not clear);

3. FinScan's president was also ScanWare's president and he tried to resolve Rayonier's concerns with the ScanWare product;

4. The system sold by ScanWare was basically a FinScan product.

Based on these facts, the court held that "ScanWare was an instrumentality or alter ego of FinScan when the contract was signed.  Although it was not a signatory to the contract, FinScan is bound by the terms of the contract."

Keep in mind that each of these facts occurred after the contract was signed.  Like I said at the outset, let's hope the standards are lower for piercing the veil to find the proper venue than to impose monetary liability.

-Marc Ward

Comments

[Gavin Craig]

Marc, Thanks for the excellent post. I think the most troubling part of the decision is that the court ewssentially re-wrote the contract and added a party. It will be interesting to see what happens if there is no settlement.