Opinion
3:02-CV-721-AH
August 20, 2002
MEMORANDUM OPINION AND ORDER
Pursuant to the written consents of the parties, the provisions of 28 U.S.C. § 636 (c), and the District Court's Order of Reassignment filed on June 26, 2002, came on to be considered Defendants Architectural Systems, Inc. and Ronald Jackson's Motion to Compel Arbitration and Stay Proceedings and Brief in Support filed on May 17, 2002; Plaintiff Buell Door Company's response filed on June 6, 2002; and Defendants' reply thereto filed on June 21, 2002. Upon review of the parties' briefs and the applicable case law, the court finds that Defendants motion should be DENIED.
I. Factual and Procedural Background
Buell Hardwood Floors, Inc. (hereinafter referred to as "Buell Floors), a wholly-owned subsidiary of Plaintiff Buell Door Company (hereinafter referred to as "Plaintiff" or "Buell Door"), entered into a contractual, commercial relationship with Defendants Architectural Systems, Inc. ("ASI") and Ronald Jackson ("Jackson"), ASI's chief executive officer, (referred to collectively as "Defendants") in October 1994. Pl.'s Resp. at 3; Pl's Resp. at Ex. B, Tab 1, ¶ 9; Defs.' reply at 3, n. 2. This relationship arose out of a "Sales Representative Agreement" entered into by the parties, whereby ASI was appointed and agreed to serve as a sales representative for Buell Floors. Pl.'s Resp. at Ex. B, Tab 1, ¶ 1 (hereinafter "Sales Agreement"). ASI's responsibilities as a sales representative included "sell[ing] and promot[ing] the sale of [Buell Floors'] products" to third-party customers within its primary territory and its national accounts territory. Pl.'s Resp. at 3; Sales Agreement at ¶¶ 1, 2. For sales which occurred in either territory, ASI was entitled to collect a commission. Sales Agreement at ¶ 4. However, according to the terms of the Sales Agreement, ASI did not engage in any direct sales of Buell Floors' products and Buell Floors reserved to itself the power to accept or reject any orders solicited by ASI, as well as the power to dictate the terms of all sales of its products. Pl.'s Resp. at Ex. B, ¶ 7 (Affidavit of Tom Reed); Sales Agreement at ¶¶ 6, 7.The Sales Agreement contains an arbitration clause which provides, in pertinent part:
12. DISPUTES AND ARBITRATION. The parties agree that any disputes or questions arising hereunder , including the construction or application of this Agreement, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in force, and that the arbitration hearings shall be held in the city [in] which the principal office of the party requesting arbitration is located.
Sales Agreement at ¶ 12 (emphasis added).
Sometime during 1995, ASI began purchasing Buell Floors' products on an open account with Buell Floors, for the purpose of selling directly to its own third-party customers. Pl.'s Response at 3. To this end, ASI submitted at least three credit applications in October 1995, February 1997, and April 2001 to Buell Floors. Pl.'s Response at Ex. B, ¶¶ 9-11. In April 2001, Ronald Jackson also submitted a "Personal Guarantee," to allay any misgivings held by Buell Floors regarding ASI's creditworthiness. See id. at ¶ 12.
On November 1, 2001, Defendants filed a Demand for Arbitration with the American Arbitration Association in New York against Buell Floors and Buell Door. See Defs.' Mot. to Compel Arbitration and Stay Proceedings ("Mot. to Compel Arbit.") at 1.
On February 27, 2002, Buell Door, d/b/a Buell Flooring Group, filed suit against Defendants in County Court at Law Number 3, Dallas County, Texas alleging the following causes of action under Texas law: a suit on a sworn account, a breach of contract claim for unpaid invoices, and for breach of a personal guarantee. See Pl.'s Response at Tab A (Plaintiff's First Original Petition); Pl's Response at 2. Following receipt of process in state court, on April 8, 2002, the Defendants removed Plaintiff's suit to this court on the basis of diversity of citizenship jurisdiction, pursuant to 28 U.S.C. § 1332. See Defs.' Notice of Removal at 1.
On May 17, 2002, Defendants filed their Motion to Compel Arbitration and Stay Proceedings pursuant to the terms of the Sales Agreement's arbitration provision.
II. Analysis
The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et. seq., creates "a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Memorial Hosp. v. Mercury Const., 460 U.S. 1, 25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Section 2 of the FAA states that a written arbitration agreement in any contract involving interstate commerce is valid, irrevocable, and enforceable except on grounds that would permit the revocation of a contract in law or equity. "Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements. . . ." Moses H. Cone Memorial Hosp., 460 U.S. at 25, 103 S.Ct. at 941. The Fifth Circuit Court of Appeals recently reiterated that "[t]he Supreme Court has made it clear that the [FAA], establishes a "liberal policy favoring arbitration' and a strong federal policy in favor of enforcing arbitration agreements'." Personal Security Safety Systems, Inc. v. Motorola, Inc., ___ F.3d ___, 2002 WL 1413702, *3 (5th Cir. July 1, 2002) (quoting Texaco Exploration and Prod Co. v. Am-Clyde Engineered Prod Co., Inc., 243 F.3d 906, 909 (5th Cir. 2001) (citations omitted)). Section 4 of the FAA permits a party to seek an order compelling arbitration if the other party has failed to arbitrate under a written arbitration agreement.
Courts are required to conduct a two-step inquiry when deciding whether parties should be compelled to arbitrate a dispute. OPE Int'l LP v. Chet Morrison Contractors Inc., 258 F.3d 443, 445 (5th Cir. 2001) (citation omitted). First, a court must decide whether the parties agreed to arbitrate the dispute. Id. at 445. "This determination involves two considerations: (1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement." Id. (quoting Webb v. Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996)); see also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985). Courts ordinarily "resolve doubts concerning the scope of coverage of an arbitration clause in favor of arbitration." Personal Security v. Motorola, Inc. at * 3 (citing Neal v. Hardee's Food Systems, Inc., 918 F.2d 34, 37 (5th Cir. 1990) (arbitration should not be denied "unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue"). If the court determines that the parties agreed to arbitrate, it must consider whether any federal statute or policy renders the claims nonarbitrable. R.M. Perez Assoc., Inc., 960 F.2d 534, 538 (5th Cir. 1992) (citing Mitsubishi Motors Corp., supra, at 628, at 3355).
For the reasons set out below this second question need not be addressed.
Was There a Valid Agreement to Arbitrate?
In order to determine whether the parties agreed to arbitrate the instant dispute, the court must first determine whether a valid agreement to arbitrate existed between the parties. It is undisputed that an agreement to arbitrate — i.e., ¶ 12 of the Sales Agreement — existed between the parties when they entered into the Sales Agreement.
However, Plaintiff contends that this arbitration clause is wholly inapplicable to the "separate and distinct" verbal "Distributor Agreement" it entered into with Defendants in 1995, which forms the basis of its present action. Pl.'s Response at 3. Plaintiff points to the following facts as indicia of this subsequent Distributor Agreement: ASI began purchasing Buell Floors' products to sell directly to its customers sometime in 1995; thereafter ASI submitted at least three credit applications to Plaintiff, each signed by Jackson; and Jackson submitted a personal guarantee to Plaintiff at its behest. Pl.'s Response at Ex. B, ¶¶ 8-12. Plaintiff further contends that these actions, which are more consistent with a manufacturer-distributor relationship, were not envisioned under the Sales Agreement. See Floyd Lofchie Assocs., Inc v. Alsy Mfg. Co., 1989 U.S. Dist. LEXIS 1458, *7-8 (N.D. Ill. December 4, 1989) (discussing the difference between a sales representative and a distributor).
On the other hand, Defendants contend that they did not enter into a separate "Distributor Agreement" with Plaintiff. Instead, Defendants accepted an oral request by Plaintiff, which merely modified the original Sales Agreement by allowing ASI to sell Buell Floors' products directly to certain, limited customers. Defs.' App. at Tab B, ¶ 4 (Affidavit of Ronald Jackson ("Jackson's Aff.")); see also Defs.' Reply at 3. According to Jackson, ASI undertook this change in relationship as an accommodation to Buell with the full intention that the Sales Agreement and its accompanying arbitration clause would continue to govern the parties relationship. Jackson's Aff. at ¶¶ 4-6.
The court notes that the Sales Agreement expressly prohibits any modification of its provisions without the written consent of both parties. Sales Agreement at ¶ 11.
Since the parties do not deny the existence of a valid arbitration clause, but rather join issue on whether it applies to the instant litigation, the court finds that the issue to be addressed is the scope of the Sales Agreement's arbitration provision.
Do the Disputes in Question Fall Within the Scope of the Arbitration Agreement?
The FAA provides that an arbitration clause in any contract "evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. However, "Interstate commerce," as defined in the FAA, is not limited to the interstate shipment of goods, but also includes all contracts "relating to" interstate commerce. In Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 274-75, 115 S.Ct. 834, 839 (1995), the Supreme Court held that Section 2 of the FAA should be read broadly to extend the Act's reach to the limits of Congress's Commerce Clause power. Id. (the "involving commerce" requirement is the functional equivalent of the phrase "affecting commerce").
In the present case there can be no doubt that the transactions between the parties involved commerce. For example, ASI is a New York corporation, with its principal place of business in New York City, while Buell Floors is a Texas corporation with its principal place of business in Dallas. See, e.g., Sales Agreement. The Sales Agreement provides that ASI would solicit commitments to purchase Buell Floors' products from customers in the northeastern United States. See id. at ¶¶ 1-2.
For the foregoing reasons, the court finds that the Sales Agreement was made in interstate commerce. Therefore, the provisions of the FAA apply. The next inquiry relates to the overall breadth of the Sales Agreement's arbitration clause.
Is the Arbitration Clause at Issue "Broad" or "Narrow"?
In determining the scope of an arbitration agreement that comes within the purview of the FAA, the court is mindful of the strong federal policy favoring arbitration. See Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir. 1996). The Fifth Circuit has made a distinction between "broad" and "narrow" arbitration clauses. See Hornbeck Offshore (1984) Corp. v. Coastal Carriers Corp., 981 F.2d 752, 754 (5th Cir. 1993) (citing Sedco v. Petroleos Mexicanos Mexican Nat'l Oil, 767 F.2d 1140, 1145 n. 10 (5th Cir. 1985)). If the clause is "broad," the action should be stayed and the arbitrators permitted to decide whether the dispute falls within the clause. Id. (citing Sedco v. Petroleos Mexicanos Mexican Nat'l Oil, 767 F.2d at 1145 n. 10). On the other hand, if the clause is "narrow, " the matter should not be referred to arbitration or the action stayed, unless the court determines that the dispute at issue falls within the clause. Id. at 755.
In Pennzoil Exploration and Prod Co. v. Ramco Energy Ltd, 139 F.3d 1061 (5th Cir. 1998), the Fifth Circuit Court of Appeals reviewed a clause which mandated arbitration of "[a]ny dispute, controversy or claim arising out of or in relation to or in connection with [an agreement]. . . ." and, citing Prima Paint Corp., v. Flood Conklin Mfg. Co., 388 U.S. 395, 397-98, 87 S.Ct. 1801, 1802-03, 18 L.Ed.2d 1270 (1967), wherein the Supreme Court labeled as "broad" a clause requiring arbitration of "[a]ny controversy or claim arising out of or relating to this Agreement. . ." and Nauru Phosphate Royalties, Inc. v. Drago Daic Interests, Inc., 138 F.3d 160, 164-65 (5th Cir. 1998), wherein the Fifth Circuit held that when parties agree to an arbitration clause governing " [a]ny dispute arising out of or in connection with or relating to this Agreement," they "intend the clause to reach all aspects of the relationship," held that the clause was undoubtedly "broad" in scope. Id. at 1067 (emphasis added).
The Pennzoil court further held that "broad" arbitration clauses are not limited to claims which literally "arise under [a] contract," but rather embrace all disputes between the parties having a signficant relationship to the contract regardless of their label. Id. (emphasis added) (citing J.J. Ryan Sons v. Rhone Poulenc Textile, 863 F.2d 315, 321 (4th Cir. 1988) and Miller v. Flume, 139 F.3d 1130, 1136 (7th Cir. 1998)). As such, the court also held that it was not necessary that the dispute between the parties "arise out of' the contract in order to be arbitrable, only that the dispute relate to," be "connected with," or "touch" the contract. Id. (citing Mitsubishi Motors Corp. v. Soler-Chrysler Plymouth Inc., 473 U.S. 614, 625 n. 13, 105 S.Ct. 3346, 3353 n. 13, 87 L.Ed.2d 444 (1985) and Commerce Park at DFW Freeport v. Mardian Const, Co., 729 F.2d 334, 339 n. 4 (5th Cir. 1984)).
The court in Pennzoil Exploration proceeded to distinguish "broad" arbitration clauses from narrow" arbitration clauses by noting that the latter pertain to disputes "arising out of" the contract, citing the Ninth Circuit's opinion in Tracer Research Corp. v. National Envtl. Svcs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994). Id. at 1067.
In the instant case, the Sales Agreement between the parties mandated arbitration for ". . . any disputes or questions arising hereunder, including the construction or application of this Agreement. . . ." Sales Agreement at ¶ 12 (emphasis added). As this "any disputes. . . arising hereunder . . ." language does not clearly fit within either the "broad" or "narrow" clauses addressed in Pennzoil or Tracer Research, further analysis is necessary.
In Sedco v. Petroleos Mexicanos Mexican Nat'l Oil, 767 F.2d 1140 (5th Cir. 1985), the Fifth Circuit reviewed an arbitration clause which provided that " [a]ny dispute or difference between the parties arising out of this [agreement] shall, at the request of either party, be referred to three arbitrators . . ." Id. at 1144 n. 8 (emphasis added). The court found that the arbitration clause was of the broad type. Id. at 1145 (emphasis added) (citing Caribbean Steamship Co. v. Sonmez Denizcilik Ve Ticaret, 598 F.2d 1264, 1266 (2nd Cir. 1979) (wherein the court found that an arbitration clause which provided that" . . . any dispute aris[ing] between [the parties]. . . shall be referred to [arbitration]. . ." constituted a broad clause).
Subsequent to Sedco, the Fifth Circuit has had further occasion to address the distinction between "broad" and "narrow" clauses. In Explo, Inc. v. Southern Natural Gas Co., 788 F.2d 1096, 1098-99 (5th Cir. 1986), the court, citing Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir. 1983), recognized that "arises under" language in an arbitration clause was narrower than the broader "arising out of language in such a clause. Id. (emphasis added). In Neal v. Hardee's Food Systems, Inc., 918 F.2d 34 (5th Cir. 1990), the court held that where the parties included a broad arbitration clause in a license agreement governing "any and all disputes between [the parties], " they intended the clause to reach all aspects of the parties' relationship, including actions not specifically contemplated within the agreement. Id. at 38 (emphasis added). See also Hornbeck Offshore (1984) Corp. v. Coastal Carriers Corp., 981 F.2d 752, 754-55 (". . . any dispute aris[ing] between [the parties], . . . shall be referred to [arbitration]," was held to be broad). In Texaco Exploration and Production Co. v. AmClyde Engineered Products Co., Inc., 243 F.3d 906, 909 (5th Cir. 2001), the court, citing Hornbeck and Sedco, held that an arbitration clause which provided that ". . . any controversy or claim, whether based in contract, tort or otherwise, arising out of relating to or in connection with the Agreement" be referred to a three-step dispute resolution process, which included arbitration, was broad. Id. (emphasis added). Most recently, in Personal Sec. Safety Systems v. Motorola, Inc., supra, the court has held that an arbitration provision which mandated arbitration of ". . . any and all claims . . . and matters in question arising out of or relating to this Agreement. . .," was not limited to claims which "arise under the contract, but rather embrace[d] all disputes . . . having a significant relationship to the contract. . . ." Id. (emphasis added) (citing Pennzoil).
However, finding that the controversy at issue arose out of the same contract in which the arbitration clause appeared, the court ordered the dispute to arbitration.
Upon reviewing the above referenced Fifth Circuit cases, the court concludes that the phrase "arising out of" and similar language constitute "broad" arbitration clauses. Accord Morphis v. Federal Home Loan Mortgage Corp, No. 3:02-CV-0210-P, 2002WL 1461930, *3-4 (N.D. Tex. July 3, 2002) (provision that "any and all disputes between [the parties]," with no limiting clause constituted a broad clause). On the other hand, the phrase "arising under" indicates a "narrow" arbitration clause. See Mediterranean Enterprises v. Ssangyong, 708 at 1464 (the term "arising under" is relatively narrow) (citation omitted).
Based upon the court's independent research, it does not appear that the Fifth Circuit has addressed the phrase "arising hereunder" in the context of an arbitration clause. However, in light of the court's citation to Mediterranean Enterprises v. Ssangyong, supra, in Explo, Inc. v. Southern Natural Gas Co. and the fact that the Ninth Circuit specifically addressed this phrase, to wit: "arising hereunder," see id. at 707 F.2d at 1463, I conclude that the court's analysis in Mediterranean Enterprises is that which should apply in the present action.
In Mediterranean Enterprises, the court found the phrase "arising hereunder" to be synonymous with the oft-used "arising under. . ." language and, absent accompanying "relating to" language, as such, that the same only covered a narrow scope of disputes such as the interpretation and performance of the particular contract at issue. Id. at 1464.
In the present case, the parties employed virtually the identical language as that used in Mediterranean Enterprises, supra, mandating arbitration of ". . . any disputes or questions arising hereunder, including the construction or application of this Agreement. . . ." Sales Agreement at ¶ 12 (emphasis added). Accordingly, the court finds that the parties intended the arbitration clause to have a very narrow scope, i.e., applying only to matters which "arise under" the contract.
The omission of the "relating to" language is "significant." Mediterranean Enterprises, 708 F.2d at 1464 (citation omitted). "When parties use expansive language in drafting an arbitration clause, presumably they intend all issues that "touch matters' within the main agreement to be arbitrated, (citation omitted), while the intended scope of a narrow arbitration clause is obviously more limited." Louis Dreyfus Negoce S.A. v. Blystad Shipping Trading Co., 252 F.3d 218, 225 (2nd Cir. 2001).
The court now addresses whether the Plaintiff's claims in this action are matters "arising under" the Sales Agreement. As noted previously, Plaintiff contends that its disputes arose out of a separate, verbal "Distributor Agreement," which it entered into with Defendants some months after the Sales Agreement was executed. Whereas Defendants, on the other hand, claim that no such separate agreement was entered into, but rather that the Sales Agreement was modified, at Plaintiff's verbal request, to provide for direct sales of Buell Floors' products to ASI so that ASI could, in turn, sell directly to customers.
There are several factors which foreclose Defendants' argument that the oral agreement regarding ASI's purchase of Buell Floors' products was integrated into the written "Sales Representative Agreement" and thus subject to that agreement's arbitration clause.
Aside from the fact that the oral agreement did not comply with the express requirement that any modifications be made with the written consents of both parties, Sales Agreement at ¶ 11, the oral agreement was made some months after the written agreement was executed and for which new consideration was given in the form of credit applications and the personal guarantee of Ronald Jackson.
Perhaps the most pertinent factor is the difference in the relationships between the Plaintiff and Defendants under the written Sales Agreement and under the subsequent oral agreement. Under the former, ASI operated solely as a sales representative for Plaintiff in specifically designated territories. ASI did not purchase any products from Plaintiff, nor was it responsible for any collections on accounts owed by purchaser's of Plaintiff's products within ASI's territories.
On the other hand, the oral agreement resulted in direct purchases by ASI of Plaintiffs products which it in turn sold to its own customers. As a customer of Plaintiff, ASI had a distinctly different role than that of a commissioned sales representative as described in the written Sales Agreement.
Under the relevant facts it is questionable whether the oral "Distributorship Agreement" has any significant relationship to the "Sales Representative Agreement."
III. Conclusion
Notwithstanding the federal policy favoring arbitration, as a creature of contract ". . . a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers v. Warrior Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960). A court is not permitted to expand the parties' agreement to arbitrate in order to achieve greater efficiency. Tracer Research Corp. v. National Envtl. Svcs. Co., supra, 42 F.3d at 1294. Moreover, as the Supreme Court stated in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), "Courts should not assume that the parties agreed to arbitrate . . . unless there is `clea[r] and unmistakabl[e]' evidence that they did so." Id. at 944, 115 S.Ct. at 1924 (quoting AT T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986)).It is therefore ORDERED that Defendants' Motion to Compel Arbitration and Stay Proceedings is in all things DENIED.
0n July 15, 2002, Plaintiff moved the court for leave to file a surreply, and appendix in support thereof, to Defendants' reply filed on June 21, 2002. Plaintiff's motion is denied as the same is now moot in light of the court's disposition of the instant matter.