Opinion
Civil No. 03-6073 (JRT/FLN).
August 31, 2004
John K. Rossman, MOSS BARNETT, Minneapolis, MN, for plaintiffs.
Ted E. Sullivan, LIND, JENSEN, SULLIVAN PETERSON, P.A., Minneapolis, MN, for defendants.
MEMORANDUM OPINION AND ORDER
Plaintiffs Sybaritic, Inc. and Skandialife Manufacturing, Ltd. (together, "plaintiffs") design, develop, manufacture, sell, and distribute health care products and machines including "health environment capsule machines." Defendant NeoQi, Ltd. produces and distributes competing health care machines. Defendant Mati Vann is the founder and Chairman of the Board of NeoQi. Plaintiffs have sued defendant Vann for misappropriation of trade secrets and unfair competition under the Lanham Act. Plaintiffs have sued NeoQi for breach of contract. The Court has twice granted plaintiffs temporary restraining orders against defendants, requiring defendants to post a sign at trade shows where both companies are present advising would-be purchasers that the product is subject to ongoing litigation. Defendants move the Court to compel arbitration and dismiss or stay any proceedings pending arbitration of some or all of the claims. Plaintiffs have brought a motion for sanctions, stemming from defendants' alleged failure to comply with the Court's last temporary restraining order. For the following reasons, the Court grants in part and denies in part defendants' motion, and denies plaintiffs' motion.
BACKGROUND
In 1997 plaintiffs began negotiations with an Estonian corporation called Balteco concerning a new line of reclining single person saunas. Defendant Mati Vann was at that time the Chairman of the Board of Balteco and participated in the negotiations on Balteco's behalf. After negotiating a confidentiality agreement, plaintiffs and Balteco agreed that Balteco would manufacture plaintiffs' "Health Star" and "Health Steam" products. The confidentiality agreement initially defined the protected product as:
A health environment capsule, also called a personal vibrating sauna, with unique exterior design configuration and shape permitting a person to lay inside the capsule chamber for health and relaxation purposes. Mechanical features include means of permitting aroma to the chamber and/or heated air, and/or vibration to the chamber bed, and/or music via installed system or speakers, balls, an operating system permitting choice of any of the features and a timer device.
The confidentiality agreement was amended twice. The first amendment, in pertinent part, redefined "health environment capsule," making the definition more detailed, referencing several patents, and specifying that "[w]hat a machine is called or described is not important. It is the design, features and/or functions that are definitive." The agreement prohibited Balteco from using, copying, or disclosing Sybaritic's product inventions and from competing with Sybaritic using the Sybaritic product invention technology. The confidentiality agreement was expressly incorporated into an "Exclusive Manufacturing License Agreement." Vann executed both the confidentiality agreement and the Manufacturing License Agreement for Balteco.
Sometime in 2001, Vann began planning a new company, NeoQi, Ltd. Shortly thereafter, Vann left Balteco and, through NeoQi, began development of a series of personal spa capsules. The series includes the Harmony, Balance, and Professional models. According to defendants, the Harmony series combined infrared sauna, steam sauna, aroma therapy, vichy showers, vibromassage, hydromassage, underwater hand massage, and a music system in one reclined capsule. Plaintiffs contend that defendants used plaintiffs' proprietary information, as defined in the confidentiality agreement, in developing the Harmony line.
Defendants informed plaintiffs of the forthcoming Harmony line in late 2001. According to plaintiffs, upon learning of the Harmony line, they sought to reduce their potential losses from the competing and infringing product by becoming a distributor of the Harmony line. Plaintiffs maintain that this action did not waive their claims of misappropriation and/or infringement. Plaintiffs and NeoQi signed a Distributor Agreement on February 12, 2002, granting plaintiffs the exclusive sales and distribution rights in Japan, Taiwan, Hong Kong, China, Korea, Italy, the United States and Mexico. At the same time, plaintiffs and NeoQi entered into the "Seven Month Search Agreement," which granted plaintiffs the right to secure exclusive sub-distributors in Singapore/Malaysia, Philippines, Vietnam, Indonesia, Thailand, Greece/Cyprus/Turkey, the United Kingdom, France, Benelux, South America and the Middle East. The Distributor Agreement contained an arbitration provision and an integration clause.
On September 17, 2003, NeoQi sent plaintiffs a letter expressing its dissatisfaction with plaintiffs' performance and indicating its intent to void the Distributor Agreement and look for new distributors in all markets other than Greece/Cyprus/Turkey. A subsequent letter from NeoQi dated October 23, 2003 formally voided the Distributor Agreement. Plaintiffs contend that NeoQi breached the terms of the Distributor Agreement and the Seven Month Search Agreement in a number of ways, including by failing to conduct a pre-delivery inspection of each unit or provide a written report for each machine. Plaintiffs assert that these various breaches prevented them from successfully fulfilling their obligations under the Distributor Agreement.
Plaintiffs filed this action on November 5, 2003 alleging that (1) Vann unfairly competed and misappropriated trade secrets in forming NeoQi and developing the Harmony line and (2) NeoQi breached the Distributor Agreement and another, related agreement. Since then, plaintiffs have twice appeared before this Court to request temporary restraining orders in relation to trade shows at which both plaintiffs and defendants have been scheduled to appear. This Court has granted both requests, and ordered defendants to post a sign at their booth indicating that the product is subject to ongoing litigation.
Defendants contend that the arbitration provision in the Distributor Agreement requires that the current action, in its entirety, be submitted to arbitration and therefore move the Court to dismiss or stay the matter pending arbitration. Plaintiffs agree that the breach of contract claims against NeoQi should be stayed pending arbitration, but argue that the tort claims are separate and should proceed in this Court. Plaintiffs move the Court for sanctions against defendants for failure to observe the terms of the Court's most recent temporary restraining order.
ANALYSIS
I. Arbitrability
As noted above, the Distributor Agreement contains an arbitration provision. In relevant part, this provision states:
10. MISCELLANEOUS:
a. USA, Zurich or Geneva Arbitration: The appointed laws, exclusive jurisdiction and resolution of any and all controversies relating to this Agreement shall be submitted for resolution to arbitration before and by either the American Arbitration Association (in USA), or the Conciliation and Arbitration Regulations of the International Chamber of Commerce (in Zurich or Geneva) and shall be according to the aforementioned jurisdiction and regulations of the arbiter chosen.
The Federal Arbitration Act instructs district courts to enforce the parties' decision to remove their controversy from the judicial realm and have it decided by arbitration. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985). The validity of an arbitration clause and its applicability to the dispute at hand are questions initially for the district court to decide. Bob Schultz Motors, Inc. v. Kawasaki Motors Corp., 334 F.3d 721, 726 (8th Cir. 2003) ( citing Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967); Houlihan v. Offerman Co., 31 F.3d 692, 694-95 (8th Cir. 1994)). If the Court determines that the arbitration clause is valid and applicable, the Act requires the Court to direct the parties to proceed to arbitration in accordance with the terms of their agreement. Bob Schultz Motors, 334 F.3d at 725-26 ( quoting 9 U.S.C. § 4).
The parties do not argue that the arbitration clause is not valid. Thus, the only task for this Court is to determine whether the parties agreed to arbitrate the dispute at issue in this case. Generally, "there is a presumption of arbitrability in the sense that `[a]n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.'" AT T Tech., Inc. v. Communications Workers of America, 475 U.S. 643, 650 (1986) ( quoting United Steelworkers of America v. Warrior Gulf Navigation Co., 363 U.S. 574, 582-83 (1960)). That said, a party who has not agreed to arbitrate a dispute cannot be forced to do so. AT T Tech., 475 U.S. at 648.
Plaintiffs' misappropriation and unfair competition claims are against Vann individually. Vann individually is not a party to the Distributor Agreement. Thus, plaintiffs question whether Vann is entitled to enforce the arbitration clause on his own behalf. The Court need not determine whether Vann has standing to enforce the arbitration clause because the Court concludes that the scope of the arbitration clause does not include plaintiffs' tort claims against defendants.
The Court notes, however, that in Nesslage v. York Sec., Inc., 823 F.2d 213, 233-34 (8th Cir. 1987), the court found that an introducing broker who was not a party to a customer agreement was nevertheless entitled to enforce the arbitration clause in the customer agreement because the broker was a third party beneficiary to the customer agreement and was a disclosed agent of a party to the agreement. By analogy, Vann, who signed the Distributor Agreement on behalf of NeoQi but is not himself a party to the Agreement, might have standing to enforce the arbitration clause in the Distributor Agreement with respect to the claims that only pertain to him. As the founder and Chairman of the Board of NeoQi, he is arguably a third-party beneficiary of the Distributor Agreement. Additionally, as the primary negotiator and signatory on behalf of NeoQi, he likely qualifies as a disclosed agent of NeoQi.
The arbitration provision in the Distributor Agreement states that "any and all controversies relating to this Agreement" shall be submitted to arbitration. The Distributor Agreement also provides that "[t]his agreement only pertains to the specific terms and conditions herein, and does not modify, amend or change any other relationship, agreement, duty or obligation between the parties." Defendants argue that because the Distributorship Agreement pertains to specific products, any other claims relating to those specific products are included in the arbitration clause. Such a reading of the arbitration clause is too broad.
Arbitration agreements are contracts, and are to be interpreted according to general contract principles. Int'l Ass'n of Bridge, Structural, Ornamental and Reinforcing Ironworkers, Shopman's Local 493 v. EFCO Corp. and Const. Products, Inc., 359 F.3d 954, 955-56 (8th Cir. 2004) (citation omitted). The Court applies ordinary state law contract principles to decide whether parties have agreed to arbitrate a particular matter, giving "healthy regard for the federal policy favoring arbitration." AgGrow Oils, L.L.C. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 242 F.3d 777, 781 (8th Cir. 2001). The Court looks first to the language of the arbitration provision. Winthrop Resources Corp. v. Eaton Hydraulics, Inc., 361 F.3d 465, 470 (8th Cir. 2004) (applying Minnesota law). If the language of the contract is unambiguous, the Court may not consider additional extrinsic evidence. Id.
The specific terms and conditions of the Distributor Agreement concern the right to "sell, deliver, ship or demonstrate" the NeoQi line of products. The design or manufacture of the Harmony products is different from, and does not involve or "relate to," the distribution of the Harmony products. That is, plaintiffs' claims for misappropriation of trade secrets and unfair competition stand entirely alone, and do not require reference to the Distributor Agreement or the alleged breach of the Distributor Agreement. Thus, the language of the contract clearly indicates that plaintiffs agreed to arbitrate disputes arising from Distributor Agreement. Indeed, plaintiffs agree that the breach of contract claims against NeoQi must be submitted to arbitration. However, the Court finds that, under the plain language of the contract, plaintiffs did not intend to arbitrate tort claims that are, at best, tangentially related to the subject of the Distributor Agreement. The Court therefore grants defendants' motion to compel arbitration with respect to plaintiffs' breach of contract claims against NeoQi, but denies the motion with respect to the remaining claims against Vann.
The tort claims are brought against Vann individually. Vann was not a party to the Distributor Agreement, although he signed it on behalf of NeoQi. Any success plaintiffs may have on their breach of contract claims may constitute mitigation of plaintiffs' damages caused by Vann's alleged misappropriation of trade secrets and unfair competition. That aside, Vann in his individual capacity has no tie to the Distributor Agreement.
II. Stay or Dismiss
In light of the Court's decision not to compel arbitration of plaintiffs' tort claims, dismissal of these claims is not appropriate. However, defendants argue that the Court should nevertheless stay further consideration of the tort claims. More specifically, defendants contend that requiring the breach of contract claims and the tort claims to proceed contemporaneously will be a waste of resources because the claims involve the same or overlapping discovery. Additionally, defendants argue that having this Court and an arbitrator consider related, and possibly identical, issues simultaneously creates the possibility of inconsistent decisions and conflicting results.
The decision to stay the remaining nonarbitrable claims, pending the outcome of arbitration, is "soundly vested in the District Court's discretionary authority to control its docket." Simitar Entm't, Inc. v. Silva Entm't, 44 F. Supp. 2d 986, 997 (D. Minn. 1999) (citation omitted). As noted above, the tort claims and the arbitrable contract claims are independent of each other, and can proceed independently. As indicated by the two temporary restraining orders that have been issued, the claims involved in this case are pressing and require prompt resolution. The Court has no way of knowing when arbitration of the contract claims will take place or conclude, and the Court therefore believes that the best way to ensure resolution of all of the claims in the shortest timeframe is to allow the tort claims to proceed in this Court without waiting for arbitration of the contract claims. The Court therefore denies defendants' motion to stay the tort claims pending arbitration of the contract claims.
III. Motion for Sanctions
Plaintiffs seek sanctions against defendants, alleging that defendants failed to comply with the Court's most recent temporary restraining order. Plaintiffs seek the attorney's fees incurred in bringing the motion for the temporary restraining order.
It is unquestionable that parties before the Court must comply with the Court's orders and may be sanctioned for failure to do so. Int'l Bhd. of Elec. Workers, Local Union No. 545 v. Hope Elec. Corp., 293 F.3d 409, 415 (8th Cir. 2002). The Court's authority to impose sanctions for failure to comply with an injunction is to be "carefully and precisely employed" and is left to the discretion of the Court. Id. at 415 (citation omitted). Monetary sanctions may be appropriate where a party has intentionally disregarded the Court's order. See, e.g., Lexis-Nexis v. Beer, 41 F. Supp. 2d 950, 955 (D. Minn. 1999). The Court finds that, assuming defendants failed to comply with the Court's order, sanctions nevertheless are not warranted.
Plaintiffs filed their motion for temporary restraining order on April 1, 2004 seeking relief related to a tradeshow scheduled to open in Italy the next day. A telephone hearing was held at 4:30 p.m. on April 1, at which time it was already 11:30 p.m. in Italy. Following the hearing, the Court ordered defendants to post a notice at their booth at the tradeshow. Defendants admit that they did not post the sign that the order required, but assert that they did not learn of the order until after the show had started.
According to affidavits submitted by defendants, defendants' counsel in Minneapolis contacted defendants' counsel in Estonia, advised him that the Court had issued an order, and asked him to get in touch with Vann and with counsel in Minneapolis. The Estonian counsel called Vann, who was already in Italy, on his cell phone and relayed the message. The Estonian counsel also asked counsel here to provide him with a copy of the order. Until the Estonian counsel got a copy of the order, he misunderstood the order to permit plaintiffs to post a sign on defendants' booth, rather than to require defendants to post a sign themselves. It was not until the Estonian counsel received a copy of the order, by which time the show was nearly over, that defendants understood that they were supposed to post their own sign.
Defendants' attorney notified the Court the day after the telephone hearing that he was having trouble contacting his clients, and asked for guidance. The Court instructed counsel to do his best to notify his clients, and to tell his clients to do their best to comply with the order — even if that meant making a hand-lettered sign. Given defendants' counsel's obvious efforts to ensure compliance, and the exceedingly short timeframe, the Court does not believe that defendants' failure to comply was intentional or serious enough to warrant sanctions. The Court is confident that defendants will comply with all future orders.
ORDER
Based on the foregoing, all the records, files, and proceedings herein, IT IS HEREBY ORDERED that1. Defendants' Motion to Compel Arbitration, Motion to Dismiss, or in the alternative, Motion to Stay [Docket No. 21] is GRANTED IN PART and DENIED IN PART as follows:
a. Plaintiffs' are ORDERED to submit their claim for breach of contract to arbitration in accordance with the February 12, 2002 Distributor Agreement;
b. All further proceedings with respect to plaintiffs' breach of contract claim are STAYED PENDING ARBITRATION;
c. Defendants' motion is DENIED in all other respects.
2. Plaintiffs' Motion for Contempt [Docket No. 30] is DENIED.