Opinion
Case Nos. 2D01-1872, 2D01-1882 Consolidated.
Opinion filed May 3, 2001.
Appeal from nonfinal order of the Circuit Court for Pinellas County; Catherine M. Harlan, Judge.
Charles P. Schropp and Amy S. Farrior of Schropp, Buell Elligett, P.A., Tampa; Sigmund S. Wissner-Gross and Clifford J. Bond of Heller, Horowitz Feit, P.C., New York, New York; Robert L. Begleiter of Constantine Partners, New York, New York, for Appellants.
F. Wallace Pope, Jr., of Johnson, Blakely, Pope, Bokor, Ruppel Burns, P.A., Clearwater; Paul K. Rowe and Jeffrey C. Fourmaux of Wachtell, Lipton, Rosen Katz, New York, New York, for Appellees.
Appellants challenge a nonfinal order staying their tort action and compelling arbitration. The order under review also compels arbitration of several claims asserted by Appellees. We reverse in part and affirm in part.
Background
Appellants, Kenneth Davidson, Peter Graham, Alan Blazei, Jack Cahill, and Davis Henley, are long-term shareholders and former officers of Maxxim Medical, Inc. (Maxxim), and Circon Corporation (Circon). Circon was a wholly owned subsidiary of Maxxim prior to the transaction giving rise to this dispute. Both companies manufacture and market medical devices and equipment. Appellant, Davidson Management International Limited Partnership, is a family limited partnership and holds shares of Maxxim common stock beneficially owned by Kenneth Davidson. Appellee, Fox Paine Co., LLC, manages Fox Paine Capital, LLC, which is the general partner of Fox Paine Capital Fund (collectively Fox Paine). Appellees, Saul Fox, W. Dexter Paine, III, Jason Hurwitz, and James Kroner, are directors of Fox Paine and are also directors of Maxxim and Circon. Appellees, Akbar Naderi and Mark Sellers, are directors of Maxxim and Circon.
Maxxim was formed from a private company established by Dr. Ernest Henley and his son, Davis Henley, in the mid-seventies. Davidson and Graham joined the company in 1986 when it was still a small, closely-held corporation. Between 1986 and 1998 Maxxim's revenues grew from $4.7 million to approximately $522.5 million. In 1990 the company went public and became listed on the NASDAQ, and three years later Maxxim stock appeared on the New York Stock Exchange. Maxxim's explosive growth did not go unnoticed. In 1997, Saul Fox contacted Kenneth Davidson, then chairman of the board, president, and chief executive officer of Maxxim, to express Fox Paine's interest in acquiring Maxxim. Fox offered to "work out a long-term arrangement acceptable to [Maxxim's] existing senior management team to secure their long-term continuity at, as well as financial participation in, [Maxxim]," and in June 1999, informal discussions gave way to formal negotiations for a leveraged buyout (LBO) of Maxxim and its subsidiary, Circon. Throughout these negotiations, Fox Paine representatives maintained that they had no interest in managing Maxxim and that Appellants would continue in their positions as officers and directors of the company. Appellants would also receive valuable stock options after the transaction closed.
As part of the negotiations, Fox Paine required an investor participation agreement with Appellants and other Maxxim shareholders. As "continuing shareholders," these parties were required to invest or rollover their existing stock and stock options, rather than cashing them out on the same terms offered to nonparticipating shareholders. Fox Paine representatives explained that the investor participation agreement was necessary to sell the LBO to lenders. They insisted that in order to successfully finance the transaction, it was essential to demonstrate that major shareholders were prepared to risk their own stock and stock options on the future of Maxxim and Circon.
Prior to the LBO, in a letter and proxy statement to shareholders, Kenneth Davidson advised that Maxxim's board of directors had unanimously approved the "merger." The letter also explained that the merger could not go forward unless holders of a majority of the outstanding shares of Maxxim common stock voted to approve it. Davidson assured shareholders that "the terms of the merger [were] advisable, fair to, and in the best interest of Maxxim and its shareholders." Thus, in further reliance on Fox Paine's representations, Davidson encouraged other Maxxim shareholders to vote in favor of the LBO.
At some point during negotiations, Fox Paine requested that Circon be split off from Maxxim to become an entirely separate entity. As a separate corporation, Circon would purportedly receive a $70 to $80 million tax benefit. Appellants allege that Fox Paine assured them that Circon would continue to be managed in the same manner and by the same team. Based on these representations, Appellants agreed to the split of Circon and Maxxim. The parties concede that prior to the split, the two companies essentially operated as one.
The LBO closed on November 12, 1999, and left Fox Paine and its representatives holding a controlling portion of Maxxim's stock and the majority of seats on its board of directors. Appellants, Davidson, Graham, Blazei, and Cahill (collectively referred to as the signatory executives), executed employment agreements which became effective on the date of closing. These agreements contain the arbitration clauses which form the basis of the present dispute. The agreements also set forth conditions of termination and stipulated compensation packages depending on whether the termination resulted due to death or disability, "cause," or for "good reason."
Appellants allege that after the transaction closed, Fox Paine began to immediately engage in conduct which demonstrated that its prior representations were false and had been fraudulently made to induce Appellants to consent to, endorse, and invest in the LBO. This conduct included, among other things, Fox Paine's engaging a search firm to secure a new president for Circon one week after closing, hiring a consulting firm to evaluate and improve Maxxim and Circon's profitability less than three months after the closing, preventing Circon's planned acquisition of Endolap Incorporated, rejecting the planned sale of part of Maxxim's business to Kimberly Clark, and terminating Davidson, Graham, Blazei, Davis Henley, and other continuing shareholders in July 2000, which in turn caused Cahill to resign for "good reason."
Procedural History
In response to the foregoing events, Appellants initiated a shareholder suit in Pinellas County, Florida, on September 18, 2000. In their amended complaint, Appellants allege that Fox Paine induced them to invest their life savings (over $37 million in stock and stock options) in the LBO by repeatedly representing that Maxxim and Circon would continue to be managed in the same manner and by the same team after the LBO. The amended complaint contains five counts, none of which are based upon the employment agreements. Count I alleges common law fraud and seeks damages against Fox Paine for fraudulent inducement. Count II alleges aiding and abetting in the fraud described in count I and seeks damages against Naderi and Sellers. Count III alleges violations of Florida securities law, section 517.301, Florida Statutes (1999), and the Delaware Securities Act, Delaware Code sections 7303 and 7323(a)(2) (1999). Count IV alleges violations of Delaware Code section 7323(b) (1999) and seeks damages against Fox Paine and Fox, Paine, and Hurwitz, individually. And, count V alleges breach of fiduciary duty and makes a derivative claim on behalf of Maxxim and Circon against Fox, Paine, Hurwitz, Naderi, and Sellers for corporate waste.
In September 2000, Ernest Henley filed a civil action in the District Court of Harris County, Texas, No. 2000-50447, asserting similar claims.
Without answering the amended complaint, Appellees commenced an arbitration action pursuant to the arbitration clauses contained in the employment agreements. Appellees' demand for arbitration asserts eight claims against the signatory executives. After filing their demand for arbitration, Appellees moved to stay Appellants' Pinellas County action and to compel arbitration of their claims. Appellants filed a cross-motion to stay proceedings in Appellees' arbitration action and to enjoin Appellees from proceeding to arbitration on their claims. The circuit court granted Appellees' motion to stay and to compel arbitration and denied Appellants' cross-motion.
Discussion
Appellants advance several arguments on appeal. We consider each in turn.
Arbitration of Appellants' Tort Claims
Before we set forth the applicable law which supports our finding that Appellants' tort claims are not subject to arbitration, we note briefly the legal conclusions and presumptions upon which our analysis is based. First, both parties couch their arguments in terms of who was and was not party to the employment agreements containing the arbitration clauses. Because we find that the claims asserted in the Pinellas County action are not arbitrable issues contemplated by the employment agreements, our analysis concerning Appellants' claims does not consider the status of each party vis-á-vis the agreements. Second, in compelling arbitration of Appellants' tort claims, the circuit court relied on a choice of law provision contained in the employment agreements selecting New York law as controlling precedent. Because we conclude that Appellants' Pinellas County action does not implicate the employment agreements, the choice of law provision has no effect, and Florida law applies.
No party can be forced to arbitrate a claim that the party did not intend or agree to arbitrate. Seifert v. U.S. Home Corp., 750 So.2d 633, 636 (Fla. 1999). Courts consider three questions when determining whether a dispute is subject to arbitration: "(1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived." Id. (quotingTerminix Int'l Co. L.P. v. Ponzio, 693 So.2d 104, 106 (Fla. 5th DCA 1997)); see also Stinson-Head, Inc. v. City of Sanibel, 661 So.2d 119 (Fla. 2d DCA 1995). The parties in this case agree that a valid arbitration clause exists. However, the question we consider relates to the second point of inquiry, i.e., whether Appellants' tort claims present arbitrable issues under the employment agreements.
The third question, regarding waiver, does not apply under these facts.
"The general rule is that where an arbitration agreement exists between the parties, arbitration is required only of those controversies or disputes which the parties have agreed [or intended] to submit to arbitration." Seifert, 750 So.2d at 636 (quoting Miller v. Roberts, 682 So.2d 691 (Fla. 5th DCA 1996)). Thus, "[t]he determination of whether an arbitration clause requires arbitration of a particular dispute necessarily rests on the intent of the parties." Seifert, 750 So.2d at 636; see also Coggin Auto. Corp. v. Reed, 750 So.2d 744 (Fla. 5th DCA 2000). The intent of the parties to an arbitration agreement can be gleaned from contract language, which is frequently characterized as narrow or broad. Arbitration clauses which state that they apply to claims or controversies "arising out of" the contract have been narrowly construed to apply only to those claims having a direct relation to the terms of the contract, while clauses which embrace disputes "arising out of, or relating to" the contract have been broadly interpreted to "encompass virtually all disputes between contracting parties, including related tort claims." Seifert, 750 So.2d at 637. Appellees argue that the arbitration clauses at issue in this case are broad and, therefore, encompass Appellants' claims. The clauses provide, "[T]he Company [Maxxim] and the [signatory] Executive[s] agree that any disputes with respect to this Agreement shall be subject to binding arbitration . . . ." We interpret this language narrowly to refer only to disputes relating to performance under, and the interpretation of, the employment contract. We also conclude that, under Florida law, even a broad interpretation of this clause would not contemplate Appellants' tort claims.
In Seifert, the Florida Supreme Court considered whether an arbitration clause in a contract for the sale and purchase of a new home required arbitration of Mrs. Seifert's wrongful death claim. Sometime after the Seiferts moved into their new home, their car was left running in the garage, and the air conditioning system distributed carbon monoxide emissions throughout the house, causing Mr. Seifert's death. In response to Mrs. Seifert's wrongful death claim, the builder, U.S. Home, moved to compel arbitration of the claim under the broad arbitration clause contained in the sales contract. This clause provided,
Any controversy or claim arising under or related to this Agreement or to the Property . . . or with respect to any claim arising by virtue of any representations alleged to have been made by the Seller or Seller's representative, shall be settled and finally determined as provided by the Federal Arbitration Act.
Id. at 635. The Fifth District held that Mrs. Seifert's wrongful death claim was subject to arbitration. U.S. Home Corp. v. Seifert, 699 So.2d 787 (Fla. 5th DCA 1997). On conflict review of Seifert andTerminix International Co. v. Michaels, 668 So.2d 1013 (Fla. 4th DCA 1996), the supreme court reversed the Fifth District's decision. The supreme court found that the contract language in Seifert was broad but nevertheless ruled that Mrs. Seifert's claim was not an arbitrable issue under the sales contract because the wrongful death claim did not arise out of, nor was it related to, the contract. Applying the "significant relationship" test for determining the arbitrability of claims under an arbitration clause, the court held that the factual allegations of the complaint did not rely upon the contract and concluded that the action was "predicated upon a tort theory of common law negligence unrelated to the rights and obligations of [parties to] the contract." Id. at 640. Thus, in order for even a broad arbitration clause to cover a disputed claim, there must be some "nexus" or "significant relationship" between the contract containing the arbitration clause and the subject dispute.Id. at 638.
Rather than characterizing the scope of arbitration clauses as narrow or broad, in several recent cases, Florida courts have applied the significant relationship test to determine whether parties intended to submit a particular claim to arbitration. See, e.g., Seifert v. U.S. Home Corp., 750 So.2d 633, 636 (Fla. 1999); Micronair, Inc. v. City of Winter Haven, 800 So.2d 622, 625 (Fla. 2d DCA 2001); Hirshenson v. Spaccio, 800 So.2d 670, 673 (Fla. 5th DCA 2001); Sullivan v. Sears Authorized Termite Pest Control, Inc., 780 So.2d 996, 998 (Fla. 4th DCA 2001); Coggin Auto. Corp. v. Reed, 750 So.2d 744, 746 (Fla. 5th DCA 2000).
Stated differently, the dispute and the contract should be related such that the dispute itself depends on the contract for its resolution.
Applying the significant relationship test to the facts of the present case, we conclude that Appellants' claims do not present arbitrable issues subject to the arbitration clause. Appellants' claims are not based on breach of contract or wrongful termination. Counts I and II of the complaint allege common law fraud and aiding and abetting in fraud, counts III and IV allege violations of Florida and Delaware securities law, and count V alleges breach of fiduciary duty. Each of these claims seeks damages based on alleged fraudulent conduct and misrepresentations made to induce Appellants' approval of, and participation in, the LBO. Moreover, all of the conduct upon which the claims are based took place before the effective date of the employment agreements. The complaint does not allege wrongful termination, or that Appellees breached a promise to retain the signatory executives indefinitely following the LBO. Indeed, the agreements themselves describe conditions under which either party could have terminated the employment relationship. Therefore, when the agreements were executed, it was understood that Appellants' continued employment was neither guaranteed nor unconditional. Rather than merely alleging wrongful termination as Appellees suggest, the amended complaint alleges that Appellees induced Appellants' participation in the LBO by falsely representing that the signatory executives would maintain managerial autonomy and would receive valuable stock options after the LBO. Appellants maintain that these false assurances induced them and other shareholders to rollover valuable stock and accept worthless stock options, which Appellees knew would never vest based on a preordained plan to terminate Appellants. None of Appellants' claims of fraud and unfair dealing require reference to, or construction of, the employment agreements for their ultimate resolution.
Additionally, as a policy consideration, we acknowledge the common law and statutory duties to bargain fairly and deal in good faith during "merger" transactions such as this. Rather than being predicated upon the employment agreements shared by Maxxim and the signatory executives, the factual allegations of the complaint in this case implicate common law and statutory duties owed not only to Appellants, but to all Maxxim shareholders irrespective of the employment agreements. See, e.g.,Seifert, 750 So.2d at 640 ("[If] the duty alleged to be breached is one imposed by law in recognition of public policy and is generally owed to others besides the contracting parties, then a dispute regarding such a breach is not one arising from the contract . . . . Therefore, a contractually-imposed arbitration requirement . . . would not apply." (quoting Dusold v. Porta-John Corp., 807 P.2d 526, 531 (Ariz.Ct.App. 1990))).
For the foregoing reasons, we reverse that portion of the trial court's order compelling arbitration of all claims asserted in Appellants' Pinellas County action.
Appellees' Demand for Arbitration
Appellees' demand for arbitration makes significant allegations of mismanagement, fraud, and corporate waste. The demand for arbitration was made on behalf of Maxxim, Circon, and Appellees individually. It alleged that Appellants deprived Maxxim of its right to honest and faithful employees by conferring upon themselves improper economic gain through unauthorized expense reimbursement, advances, loans, and misappropriation of company property. According to Appellees, as a result of Appellants' mismanagement, immediately after the LBO, Maxxim's financial performance declined significantly and the company failed to meet quarterly earning projections.
Count I of the demand for arbitration asserts a claim for declaratory judgment and seeks to establish that Davidson, Graham, and Blazei were terminated for "cause" and that Cahill did not resign for "good reason." Appellants concede, and we agree, that these issues must be submitted to arbitration, but count I is not limited to employment matters. It also seeks a declaration establishing that Maxxim was justified in terminating Davis Henley and that Appellees are not liable under any of the claims asserted in Appellants' Pinellas County action. Appellees also seek replevin of corporate funds, equipment, and documents (counts II and III); damages for breach of fiduciary duty based on alleged waste and misuse of corporate assets (counts IV, V, and VI); damages for breach of promissory notes based on Appellants' failure to repay employee loans (count VII); and damages for breach of contract based on the Pinellas County action allegedly filed in contravention of the arbitration clause contained in the employment agreements (count VIII).
We affirm the order compelling arbitration of these claims because with the exception of claims made in counts I and VIII, each of Appellees' claims fall squarely within the terms of the employment agreements by virtue of allegations concerning Appellants' conduct and performance as Maxxim employees. Pursuant to the choice of law provisions contained in the employment agreements, these claims are governed by New York law which only requires that they share a "reasonable relationship" with the underlying contract. See Poly-Pak Indus. Inc. v. Collegiate Stores Corp., 703 N.Y.S.2d 18, 20 (App.Div. 2000); Szabados v. Pepsi-Cola Bottling Co., 570 N.Y.S.2d 553 (App.Div. 1991).
Appellants assert that counts II through VII should not be submitted to arbitration because some of the conduct cited in these counts took place before the effective date of the employment agreements. We reject this argument because a substantial amount of the conduct which Appellees complain of took place after or continued after the LBO and because our inquiry is limited to whether the subject matter of the claims should be submitted to arbitration. Any determination on the merits of Appellees' claims is reserved for the arbitrators who will make their ruling in light of each claim and defense asserted. In the Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am., 371 N.Y.S.2d 463, 466 (App. Div. 1975).
Appellants also maintain that they should not be compelled to arbitrate any claim asserted by Circon because the employment agreements applied only to Maxxim and the signatory executives. While Circon was not party to the employment agreements, the circuit court correctly invoked the doctrine of equitable estoppel to allow arbitration of Circon's claims.Sunkist Soft Drinks Inc. v. Sunkist Growers, Inc., 10 F.3d 753 (11th Cir. 1993).
Arbitration is a contractual right predicated on the mutual decision to waive the right to trial. However, the lack of a written arbitration agreement is not an absolute impediment to arbitration. Sunkist, 10 F.3d at 756. In Sunkist, the Eleventh Circuit applied equitable estoppel to compel Sunkist Growers, a signatory plaintiff, to arbitrate its claims against Del Monte, a nonsignatory defendant, under a license agreement containing an arbitration clause. The license agreement was shared by Sunkist Growers and Sunkist Soft Drinks (SSD). After Sunkist Growers and SSD entered into the agreement, Del Monte acquired SSD and absorbed the subsidiary into Del Monte's own beverage division. Id. at 755. Following the acquisition, Del Monte effectively stripped SSD of its management and all other separate operating apparatus, and the companies operated as a single entity. Del Monte and SSD later filed suit seeking a declaration that a dispute related to SSD's performance under the agreement was subject to arbitration. Id. at 754. Sunkist Growers counterclaimed, and Del Monte moved to compel arbitration of the counterclaim pursuant to the arbitration clause in the original license agreement. Del Monte's motion was granted, and the matters proceeded to arbitration. Sunkist Growers appealed the subsequent arbitration ruling to the Eleventh Circuit. Sunkist Growers argued that it shared an agreement with SSD, not Del Monte, and sought to set the arbitration award aside on that basis.
Applying equitable estoppel, the Eleventh Circuit held that Sunkist Growers was obligated to arbitrate its counterclaim against Del Monte, notwithstanding the fact that Del Monte was not party to the original license agreement. The court reasoned that based on the close relationship shared by Del Monte and SSD, and their joint obligations to perform under the license agreement, SSD's and Del Monte's claims against Sunkist Growers were "intimately intertwined" and founded on the license agreement. Id. at 758. While the facts and procedural history in Sunkist are significantly more complex than the factual scenario presented in this case, the same equitable principles apply.
As was Sunkist Growers in the Sunkist case, the signatory executives in the present case are estopped from avoiding arbitration of Circon's claims because Circon's and Maxxim's claims are intimately intertwined and based on Appellant's performance under the same employment agreements. Appellants seek to avoid arbitrating Circon's claims by arguing that Circon was not party to the employment agreements, which were intended only to benefit Maxxim and the signatory executives. However, we reject this argument because the agreements expressly state that the signatory executives were obligated to perform management services for Circon. The agreements further provide that performance of those services was deemed part of their duties to Maxxim. This portion of the agreements is consistent with evidence in the record establishing that Maxxim and Circon operated as one entity and were governed by the same officers and directors. Based on the close relationship of the companies and the fact that the signatory executives accepted the obligation to provide Circon with management services pursuant to the employment agreements, they are estopped from denying Circon's standing to arbitrate its employment-based claims.
Appellants also contend the circuit court erred by ordering Davis Henley to arbitrate Appellees' claims for declaratory judgment because he was not party to an employment agreement. We agree. Since Davis Henley was not party to an employment agreement and is not himself making the claim against a signatory party, no legal basis exists to include him in Appellees' arbitration action-even under an estoppel theory. As the Second Circuit pointed out in Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 779 (2d Cir. 1995), because arbitration is strictly a matter of contract, courts may not compel a nonsignatory to arbitrate the claims of a signatory to a contract containing an arbitration clause. Equitable principles allow the converse and operate to estop a signatory defendant from refusing to arbitrate with a nonsignatory plaintiff when the signatory defendant has agreed to submit contract-related claims to arbitration. Id. at 779-80. However, absent Davis Henley's participation in the employment agreements, there is no legal basis upon which to require him to arbitrate Appellees' claim for declaratory judgment.
Finally, in count VIII of their demand for arbitration, Appellees seek to recover attorneys' fees and costs incurred in defending against Appellants' Pinellas County action. Because we have concluded that the arbitration clause does not encompass claims asserted in Appellants' Pinellas County action, count VIII will not be subject to arbitration on remand.
Reversed in part, affirmed in part, and remanded for further proceedings consistent with this opinion.
BLUE, C.J., and DAVIS, J., Concur.
NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION AND, IF FILED, DETERMINED.