Can I Sue an Out-of-State Company for Breach of Contract in a Texas Court?

The question is jurisdiction, not fairness

A Texas court can enter a binding judgment against a company only if it has personal jurisdiction over it. For a company based in another state, that requires two things: a Texas statute that reaches the company, and enough connection between the company and Texas to satisfy the due process clause of the United States Constitution. The out-of-state company will raise the issue first, before answering anything else, and if it wins the case is dismissed and must be refiled where the company can be sued. Getting the analysis right before filing saves months.

The Texas long-arm statute

Civil Practice and Remedies Code section 17.042 says a nonresident does business in Texas if it contracts by mail or otherwise with a Texas resident and either party is to perform the contract in whole or in part in Texas, commits a tort in whole or in part in Texas, or recruits Texas residents for employment. Texas courts read the statute to reach as far as the federal Constitution allows, so the statute is rarely the obstacle. A supply agreement under which a Texas buyer pays from Texas and receives goods in Texas satisfies it. The real test is the constitutional one.

Minimum contacts: what the company did in Texas

Due process allows a Texas court to exercise jurisdiction over a nonresident in two situations.

General jurisdiction exists where the company is essentially at home in Texas: incorporated here or with its principal place of business here. A company that merely sells into Texas is not at home here, however large its Texas sales.

Specific jurisdiction exists where the company purposefully availed itself of the privilege of doing business in Texas and the claim arises from or relates to those Texas contacts. The Texas Supreme Court in Moki Mac River Expeditions v. Drugg in 2007 held that the defendant's Texas contacts must have a substantial connection to the operative facts of the lawsuit; a merely but-for relationship is not enough. Three ideas run through the cases:

• Only the defendant's own contacts count. The plaintiff's Texas residence, and the fact that the plaintiff felt the harm in Texas, do not by themselves create jurisdiction.
• The contacts must be purposeful, not random or fortuitous. A company that solicits Texas customers, negotiates and performs in Texas, sends personnel here, or ships products here on an ongoing basis has reached into the state. A company that received one unsolicited order from a Texas buyer may not have.
• The claim must be tied to those contacts. A dispute over a Texas delivery arises from Texas contacts; a dispute over a different deal performed elsewhere does not, even if the company does other business in Texas.

For a contract case, courts look at where the contract was negotiated and signed, where it was to be performed, where payments were sent and goods or services delivered, how long the relationship lasted and whether the company sought out the Texas party. A single contract with a Texas company, performed entirely elsewhere and initiated by the Texas party, often fails. A multi-year relationship with repeated performance in Texas usually succeeds.

Serving the out-of-state company

Jurisdiction and service are separate steps, and both must be done correctly. The options for a company:

• Its Texas registered agent. A foreign entity registered to do business in Texas must maintain a registered agent and office here under Business Organizations Code section 5.201, and service on the agent is service on the company.
• The Texas Secretary of State. Under Business Organizations Code section 5.251 and Civil Practice and Remedies Code section 17.044, the Secretary of State is the company's agent for service when it does business in Texas without a registered agent, when its agent cannot be found with reasonable diligence, or when it transacts business here without registering. Duplicate copies of the process are delivered to the Secretary with the company's home office address, and section 17.045 requires the Secretary to forward the process by registered or certified mail, return receipt requested. The record of that mailing is what proves service, so the address supplied must be correct.
• Service in the other state. Texas Rule of Civil Procedure 108 permits service on a nonresident outside Texas in the same manner as service on a resident, by a disinterested adult, with the return completed under Rule 107.

A default judgment taken on defective service against an out-of-state company is vulnerable for years, and collecting it in the company's home state will require showing the home court that service was valid. It is worth doing carefully.

What the company will do: the special appearance

Texas Rule of Civil Procedure 120a lets a defendant object to personal jurisdiction by a sworn special appearance filed before any other plea or motion. The court decides it on the pleadings, affidavits, discovery and any testimony, and must rule before hearing anything else. If the court denies the special appearance, the defendant may take an interlocutory appeal, which pauses the case for months. If the court grants it, the case against that defendant is dismissed for want of jurisdiction. The plaintiff bears the initial burden of pleading facts that bring the defendant within the long-arm statute; the defendant then must negate every basis of jurisdiction the plaintiff pleaded. Pleading the Texas contacts specifically, with the documents that show them, is how the plaintiff wins this stage.

State or federal court

An out-of-state company is often a citizen of a different state, which opens the federal courthouse under 28 U.S.C. section 1332 when more than $75,000 is in controversy and every plaintiff is a citizen of a different state from every defendant. A corporation is a citizen of its state of incorporation and the state of its principal place of business; an LLC takes the citizenship of each of its members, which can make the analysis harder than it looks. A federal court in Texas applies the same personal jurisdiction test, because Federal Rule of Civil Procedure 4(k)(1)(A) ties federal jurisdiction over the defendant to what a Texas state court could do. Filing in state court does not keep the case there: the out-of-state defendant can remove a diverse case to federal court. The trade-offs are covered in whether a business case will be in state or federal court.

Example

Suppose a Dallas packaging company agrees by email to supply custom boxes to an Ohio retailer that found the company through a trade show in Texas. Over 18 months the retailer sends purchase orders to Dallas, the boxes are manufactured in Dallas and shipped from Dallas, the retailer's buyer visits the Dallas plant twice, and payments go to the company's Dallas bank. The retailer then rejects three shipments and stops paying. Section 17.042 is satisfied because the contract was performed in Texas. The retailer purposefully sought out a Texas supplier, directed a long series of orders to Texas and sent personnel here, and the dispute is about the very goods made and shipped from Texas, so the claim arises from those contacts. A Texas court should have specific jurisdiction. If the retailer has no Texas registered agent, service goes through the Secretary of State to the retailer's Ohio headquarters. Had the retailer instead received one unsolicited shipment after the Dallas company cold-called it, the jurisdictional case would be far weaker.

Collecting is the next question

A Texas judgment against a company whose assets are all in another state is enforced by domesticating it there under that state's version of the Uniform Enforcement of Foreign Judgments Act, after which the other state's collection tools apply. The process is straightforward when jurisdiction and service were sound and contested when they were not, which is one more reason to get both right at the start. Collecting in Texas is covered in how to collect a judgment against a business in Texas.

Before you file

• Pull the contract and read the forum-selection, choice-of-law and arbitration clauses first.
• List the other side's Texas contacts with dates and documents: who initiated the deal, where it was performed, who traveled where, where payment and delivery occurred.
• Identify the company's exact legal name, state of organization and registered agent, in Texas and at home.
• Consider whether a Texas judgment can be collected where the company's assets are, and whether suing there from the start would be cheaper.

Jurisdiction over a nonresident is one of the most litigated preliminary questions in Texas commercial cases, and a well-pleaded petition usually decides it. Tina Wysk represents Dallas businesses in contract disputes with out-of-state counterparties in Texas state and federal courts, including special appearance fights on both sides.