State ex rel. 3C LLC v. O'Briant

• Decision Date: 14 June 2022
• Docket Number: 21-0441
• Citation: 875 S.E.2d 273
• Parties: STATE of West Virginia EX REL. 3C LLC, and Justin Journay, Petitioners, v. The Honorable Eric H. O'BRIANT, Judge of the Circuit Court of Logan County, and Tri-State Wholesale, Inc., Respondents.
• Court: West Virginia Supreme Court

875 S.E.2d 273

STATE of West Virginia EX REL. 3C LLC, and Justin Journay, Petitioners,

v.The Honorable Eric H. O'BRIANT, Judge of the Circuit Court of Logan County, and Tri-State Wholesale, Inc., Respondents.

No. 21-0441

Supreme Court of Appeals of West Virginia.

Submitted: April 13, 2022

Filed: June 14, 2022

Corey L. Palumbo, Esq., Roger Hanshaw, Esq., Joshua A. Lanham, Esq., BOWLES RICE LLP, Charleston, West Virginia, Counsel for Petitioners

Russell D. Jessee, Esq., John J. Meadows, Esq., Devon J. Stewart, Esq., Steptoe & Johnson PLLC, Charleston, West Virginia, Counsel for Respondent, Tri-State Wholesale, Inc.

WALKER, Justice:

This case involves a business dispute rooted in a contract between Petitioner 3C LLC, d/b/a 3Chi, a manufacturer of hemp-derived vaping cartridges, and Respondent Tri-State Wholesale, Inc., d/b/a Tri-State Cannabis, its distributor. In October 2020, Tri-State filed a complaint against 3Chi and Petitioner Justin Journay, the sole member of 3Chi, in the Circuit Court of Logan County, West Virginia, even though their contract requires that any lawsuit "arising out of the breach of [their] Agreement" be filed in the Circuit Court of Hamilton County, Indiana. In this original jurisdiction action, we consider whether the circuit court committed clear legal error by denying Petitioners’ motion to dismiss the complaint based on the forum-selection clause. Because we conclude that the circuit court incorrectly applied our holding in Caperton v. A.T. Massey Coal Company¹ in evaluating the enforceability of the forum-selection clause, we grant Petitioners’ request for a writ of prohibition as moulded. We remand the case for the circuit court to determine whether Tri-State can make a "sufficiently strong showing that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching."²

I. FACTUAL AND PROCEDURAL BACKGROUND

Tri-State and 3Chi entered into an Exclusive Distribution Agreement in April 2020. The Agreement is for a three-year term and provides that Tri-State is the exclusive distributor of 3Chi's "Products," as defined in the Agreement, in West Virginia and Kentucky.³ These products include Delta 8 hemp-derived vaping cartridges.⁴ Tri-State represents that "[b]ecause Delta 8 products are derived from hemp and contain less than 0.3% Delta 9 THC," they may be lawfully sold under federal law.

This business arrangement quickly soured, and in October 2020, Tri-State filed suit against 3Chi and Mr. Journay, 3Chi's sole member, in the Circuit Court of Logan County, West Virginia.⁵ 3Chi filed suit against Tri-State in the Circuit Court of Hamilton County, Indiana, in March 2021, adhering to the Agreement's forum-selection clause.⁶

In this West Virginia action, Tri-State claims that it expended considerable time and money to quickly establish an extensive retail network for 3Chi products in West Virginia and Kentucky. It alleges that in August 2020, the United States Drug Enforcement Agency (DEA) issued an Interim Final Rule (IFR) that called into question whether it was legal to sell Delta 8 cartridges. Tri-State claims that while the hemp industry attempted to understand the full effects and implications of the IFR, 3Chi posted a notice on its website stating that the DEA had made the sale of the product illegal under the IFR. Tri-State claims that this notice made the sale of the product financially infeasible and that 3Chi was legally obligated under the Agreement to refund Tri-State the value of 3Chi's products that Tri-State had in its inventory, but that 3Chi refused to make the refund unless Tri-State agreed to a non-compete provision. Tri-State maintains that it was not obligated under the Agreement to agree to a non-compete provision in order to obtain a refund. It also claims that 3Chi and Mr. Journay "made the illegality announcement, which they did not believe themselves, in order to prevent Tri-State from being able to distribute Delta 8 products." Tri-State ultimately alleges that 3Chi and Mr. Journay's conduct was a scheme to defraud:

3Chi and Mr. Journay's conduct reveals a scheme to defraud by inducing Tri-State to invest heavily in building 3Chi's brand and warehousing 3Chi products, and once the DEA's IFR created industry uncertainty, manipulating that uncertainty—by stating that they considered Delta 8 products to be illegal and then promptly resuming sale of Delta 8 products—in order to appropriate Tri-State's distribution network for themselves.

In its four-count amended complaint, Tri-State identifies the following claims: (1) breach of contract against 3Chi for refusing to abide by the Agreement's refund provision in the event of a change in law; (2) breach of contract against 3Chi for violating the Agreement's exclusivity term; (3) fraud against 3Chi and Mr. Journay for engaging in a scheme to defraud Tri-State by posting a false statement on 3Chi's website which caused Tri-State to lose the benefits of their Agreement; and (4) tortious interference with contracts against 3Chi and Mr. Journay for interfering with the contracts Tri-State maintained with the retailers it used to market the products. Tri-State alleges that "3Chi's fraudulent scheme was effected by Mr. Journay as 3Chi's principal and the sole person controlling the company." It maintains that "Mr. Journay also is liable individually, because Mr. Journay is directly liable for his own tortious conduct and because Mr. Journay is the sole member of 3Chi and, ... so controls 3Chi, disregarding the limited liability company formalities, that there is an identity of interests between Mr. Journay and 3Chi." Tri-State seeks monetary damages including compensation for costs incurred in building its retail network and promoting 3Chi's products, compensation for lost future profits, attorney fees and costs, and an injunction "requiring 3Chi to immediately cease all sales of its products into West Virginia and Kentucky unless it does so in conformance with the parties’ Exclusive Distribution Agreement[.]"

In December 2020, 3Chi and Mr. Journay moved to dismiss Tri-State's case with prejudice, contending that Tri-State failed to comply with the dispute resolution provision of the Agreement, which requires mediation prior to suit⁷ and includes a forum-selection clause stating that "[a]ny legal suit, action, or proceeding arising out of the breach of this Agreement ... shall occur in the Circuit Court of Hamilton County, Indiana."⁸

In its response to Petitioners’ motion to dismiss, Tri-State argued that "[i]t would be unreasonable and unjust to allow 3Chi to strictly enforce the forum[-]selection clause when it has disregarded every other provision of the Exclusive Distribution Agreement." It claimed that Mr. Journay lacked contractual privity to enforce the forum-selection clause and that it was inapplicable to its claims against him. Tri-State also stated that the provision setting Hamilton County, Indiana, as the exclusive venue for lawsuits was invalid for reasons of fraud and overreaching, and that its enforcement would be unreasonable and unjust.

Specifically, Tri-State claimed that Petitioners misrepresented that the venue was selected because 3Chi was operating and planned to move its headquarters there. But Tri-State contended that Petitioners misrepresented 3Chi's location; it attached an affidavit from a private investigator claiming that she could not find that 3Chi or Mr. Journay had property or a physical address in Indiana other than 3Chi's post office box. The private investigator stated that records with the Indiana Secretary of State and Colorado Secretary of State indicate that 3Chi is registered with a principal office location in Strongsville, Ohio. In reply, Petitioners stated that 3Chi utilizes Hamilton County, Indiana, as its principal place of business, and has done so since approximately April of 2020. They also attached an affidavit from Mr. Journay stating that 3Chi moved its manufacturing facility and its principal place of business there.

On April 28, 2021, the circuit court conducted a hearing on Petitioners’ motion to dismiss; it relied on the pleadings, and other matters of record, rather than conducting an evidentiary hearing. At the conclusion of the hearing, the circuit court denied Petitioners’ motion to dismiss. In its May 21, 2021, order, it stated:

First, with regard to Mr. Journay, an individual, he is not party to this contract at issue in this action. And, the allegations against him sound in tort for fraud and tortious interference with a contract, part of which was to be performed here in Logan County. So, Mr. Journay, not having been a party to the contract, would not be able to require the Plaintiff to bring suit against him individually anywhere else. Nor does the contract create a benefit for Mr. Journay for any claims against him that sound in tort to be the subject to mediation prior to suit. Moreover, it was argued and not disputed that the mediation has now occurred, at least between the companies, and was unsuccessful.

....

Second, with regard to the 3C LLC claim that the Complaint should be dismissed as to it, the [c]ourt again, taking the allegations in the Complaint as true, would find that the mediation clause and the restricted venue clause would not be jurisdictional but would be contract provisions. Those contract provisions are presumptively enforceable unless the [c]ourt would deem them to be unreasonable or unjust. The [C]omplaint taken as a whole, would indicate that this Defendant, 3C LLC, has engaged in fraudulent acts, which affect the contract, part of which was to be enforceable here. So, taking the allegations of the Complaint as true, the [c]ourt would find that enforcement of these contract provisions would be unreasonable and unjust as to the Plaintiff.

In May 2021, Petitioners petitioned this Court requesting that we enter a writ of prohibition preventing the circuit court from continuing any further...