Opinion
Civil Action No. 01-430-JBC
December 5, 2001
MEMORANDUM OPINION ORDER
This matter is before the court upon the defendants' motion to dismiss or, alternatively, to stay all proceedings pending completion of arbitration (No. 12), the plaintiff's motion to dismiss the defendants' counterclaim (No. 14), and the defendants' motion for leave to file counterclaims (No. 17). The court, having reviewed the record and being otherwise sufficiently advised, will grant the defendants' motion to dismiss and deny the remaining motions as moot.
Factual Summary
Since this matter is before the court upon the defendants' motion to dismiss, the court accepts as true the factual allegations of the plaintiff.
The plaintiff is the nation's largest remanufacturer and distributor of automotive transmission parts. The defendants are the owners and operators of franchises of AAMCO Transmissions, Inc. and also serve as President and Vice-President/Treasurer, respectively, of the National AAMCO Dealers Association ("NADA") and as members of NADA's Board of Directors.
On March 1, 2000 the plaintiff and NADA entered into a 5-year contract that provided, among other things, that NADA would encourage its members to select the plaintiff's transmission parts. In exchange, the plaintiff agreed to provide NADA's members competitive pricing, exceptional availability, preferential delivery and freight terms, monthly rebates to NADA members, and quarterly rebates to NADA itself. Under the terms of the contract, either party could terminate the agreement after the first year "for cause," a term defined in the contract itself.
The contract between NADA and the plaintiff contained the following arbitration clause:
All disputes arising in connection with this Agreement shall be finally resolved under the Commercial Rules of Arbitration of the American Arbitration Association, by a sole arbitrator who shall be appointed in accordance with the said rules.
The agreement also provided that the contract "shall be binding upon each party . . . and shall inure to the benefit of NADA, its members and dealers on the one hand and [the plaintiff] on the other."
Not long after the plaintiff was bought by the Riverside Company, and not long after the agreement was reached, a dispute developed. Under the plaintiff's previous management, the defendants had been permitted to maintain large past — due balances and had been routinely given various perquisites (e.g., chauffeured limousine service, lavish dinners, and luxury hotel stays) at the plaintiff's business meetings. The plaintiff's new management, however, insisted that the defendants pay their overdue balances immediately and stopped giving the "perks." The defendants, as a result, retaliated by inducing the 9-member Executive Committee of NADA to concoct sham reasons to terminate the contract. On April 3, 2000, under the influence of the defendants, the Executive Committee of NADA informed the plaintiff that it had decided to terminate the contract because of "poor quality, poor parts availability, and poor overall service."
Terminate it for cause if the plaintiff failed "to provide high qua NADA tolity products, excellent availability, competitive pricing and/or good overall service to the Dealers."
On May 11, 2001, the plaintiff filed a demand for arbitration against NADA claiming that it breached the contract by terminating it without cause. In the arbitration case, the plaintiff seeks $29 million in compensatory damages. An arbitrator has been appointed and discovery is underway. On June 18, 2001, the plaintiff filed this suit against NADA's President and Vice-President for $29 million in compensatory damages, $2 million in punitive damages, and $72,589.97 from Mueller and $30,004.16 from Ganjei for unpaid bills (i.e., the amounts they allegedly owe in past-due balances). The complaint in this action states a claim against each defendant for tortious interference with contractual relations and for the recovery of the amount of money each defendant allegedly owes in past-due balances (hereafter, the "collection claims").
The defendant now moves for an order dismissing, or staying, the plaintiff's claims on the ground that they are arbitrable. The plaintiff opposes the defendants' motion on three grounds: (1) that the defendants are not parties to the contract, nor are they entitled to invoke its arbitration clause, (2) that the claims it asserts are not arbitrable, and (3) that the defendants have waived their right to arbitration by submitting the merits of the case to this court.
Legal Analysis
Section 3 of the Federal Arbitration Act (FAA), 9 U.S.C. § 3, expresses a strong federal policy in favor of arbitration agreements. It provides that a district court must stay or dismiss an action pending completion of arbitration "upon being satisfied that an issue involved in [the] suit . . . is referable to arbitration under [an] agreement." This federal policy is so strong that, although it is often said that "arbitration is simply a matter of contract," First Options of Chicago, Inc. v. Kaplan, 514 U.S. 939, 943 (1995), and that a "party cannot be required to submit to arbitration any dispute which he has not agreed so to submit," United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960), courts will often presume any dispute is arbitrable if there is an arbitration clause in a contract. See State of New York v. Oneida Indian Nation of New York, 90 F.3d 58, 62 (2nd Cir. 1996). "Although . . . the intention of the parties is relevant, the intentions of the parties to an arbitration agreement are generously construed in favor of arbitrability." American Recovery Corp., v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 94 (4th Cir. 1996).
Under the FAA, it is the duty of the court to decide what claims are arbitrable. Kaplan, 514 U.S. at 943. Because of the strong policy favoring arbitration, however, the court has been instructed that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Arnold v. Arnold Corp., 920 F.2d 1269, 1278, n. 7 (6th Cir. 1990). Hence, once a party seeking to invoke an arbitration clause proves that there exists a broad agreement that commits certain disputes to arbitration, see Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1512 (3rd Cir. 1994), aff'd, 514 U.S. 938 (1995), there is a "heavy" presumption of arbitrability for any dispute among the parties. WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 74 (2nd Cir. 1997). This presumption may be overcome only if "it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id.; Long v. Silver, 248 F.3d 309, 315 (4th Cir. 2001). If, however, the court determines that the allegations underlying the dispute "`touch matters' covered by the parties' agreements," WorldCrisa Corp., 129 F.3d at 75 , or are "significantly related" to the parties' agreements, Long v. Silver, 248 F.3d at 316-17, then the court must dismiss or stay the dispute pending completion of arbitration.
In ruling on the defendants' motion to dismiss in favor of arbitration, the court may inquire only whether: (1) there is an agreement to arbitrate; (2) there are any arbitrable claims; and (3) there has been a waiver of the right to arbitrate by the moving party or other defense to arbitration. Daisy Mfg. Co., Inc v. NCR Corp., 29 F.3d 389, 392 (8th Cir. 1994). The court may not consider the merits of any claim in deciding whether to order arbitration. AT T Technolgies, Inc. v. Communications Workers of America, 475 U.S. 643, 649-50 (1986). Nor may the court rely on the doctrinal label given to the claims (e.g., tort instead of contract); if an arbitration clause is broadly worded, then any claim or dispute is presumptively arbitrable. See United Offshore Co. v. Southern Deepwater Pipeline, 899 F.2d 405, 409 (5th Cir 1990); see also Prima Paint Corp v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967).
(1) Was there an Agreement to Arbitrate?
No dispute exists that NADA and the plaintiff entered into an agreement that contains a binding arbitration clause requiring any dispute "arising in connection with" their contract to be submitted to arbitration. The only question is whether the individual defendants are entitled to invoke the arbitration clause. Although the record reveals that the defendants are not signatories to the contract, the language of the contract itself, as well as the weight of jurisprudence, indicates that they are nevertheless entitled to invoke the arbitration clause here.
By virtue of ¶ 14(f) of the contract, "[a]ll disputes arising in connection with [the] agreement" are to be submitted to arbitration. Neither that section nor any other provision of the contract specifies, or limits, who may demand arbitration. However, ¶ 14(c) unambiguously provides that the contract — without exclusion for any of the terms — "shall inure to the benefit of NADA, its members and dealers." It is undisputed that the defendants here are members and dealers of NADA. Therefore, under a plain reading of the contract, the defendants — as members and dealers of NADA — are entitled to demand that any dispute "arising in connection with" the contract be submitted to arbitration.
Even if the plain language did not warrant this conclusion, many cases support the view that an arbitration clause should be liberally construed to include nonsignatories who are sued for actions they took while acting in representative capacity for signatories or for actions that are factually related to the actions of a signatory. For example, in Long v. Silver, 248 F.3d at 320, the court invoked "ordinary state-law principles of agency" to find that shareholders who were officers and members of the Board of Directors of a corporation, but who were not signatories to the corporation's contract (or its arbitration clause), were entitled to have claims filed against them in their individual capacity arbitrated by virtue of the corporation's status as a signatory to the contract. The Silver court noted that since the factual allegations underlying the claims against the individual defendants were similar and connected to the claims being arbitrated against the corporation, it would be contrary to the strong federal policy in favor of arbitration to deny the defendants' right to invoke the arbitration clause as an agent of the signatory defendant.
Likewise, in Arnold v. Arnold Corp., 920 F.2d at 1280-81, nonsignatory defendants who served as officers and directors of a corporate defendant that had signed an arbitration clause were entitled to invoke that clause because most of the claims sought to be litigated against them were brought for actions they took in their capacity as agents of the signatory defendant. The Arnold court, like the court in Long, also expressed concerns that allowing a party to avoid his/her duties to arbitrate claims merely by suing nonsignatory parties as defendants in their personal or representative capacity would, in effect, nullify the general rule requiring arbitration. Additionally, in Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185, 1187 (9th Cir. 1986), the court held that a broker's employees, who were nonsignatories to the underlying contract (and its arbitration clause), were entitled to demand arbitration for fraud and federal securities claims brought against them in their individual capacity.
Finally, in Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 528-31 (5th Cir. 2000), cert. denied, 531 U.S. 1013 (2000), the court invoked principles of equitable estoppel to prevent a signatory — such as the plaintiff here — from denying that a nonsignatory had a right to invoke an arbitration clause where the claims against the nonsignatory were "intertwined with and dependent upon" the contract and the claims that the signatory party was pursuing against another signatory in arbitration. According to the court in Grigson: "[E]quitable estoppel allows a nonsignatory to compel arbitration . . . when the signatory to the contract . . . raises allegations of . . . concerted misconduct by both the nonsignatory and one or more of the signatories to the contract." Id. at 527. In light of the plaintiff's theory of liability (i.e., that the defendants induced NADA to breach), equitable estoppel is also particularly applicable here.
In short, since the contract itself states that the benefits of the contract shall inure to the benefit of NADA members and dealers, and since the defendants are NADA members and dealers, they are entitled to invoke the arbitration clause under a plain-meaning interpretation of the contract. Alternatively, principles of agency and equitable estoppel require that the defendants be allowed to request arbitration under the contract.
II. Are the Plaintiff's Claims Arbitrable?
To determine whether a particular dispute falls within the scope of an agreement's arbitration clause, the court should first classify the particular clause as narrow or broad. If it is a narrow clause, the court must determine whether the dispute involves an issue that is, on its face, within the purview of the clause or whether it is over a collateral issue that is generally beyond the clause's reach. Where the arbitration clause is broad, "there arises a presumption of arbitrability." Louis Dreyfus Negoce S.A. v. Blystad Shipping Trading, Inc., 252 F.3d 218, 224 (2nd Cir. 2001). When a court determines the scope of an arbitration clause, "due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself [must be] resolved in favor of arbitration." Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Jr. Univ., 489 U.S. 468, 475-76 (1989).
Recent decisions almost uniformly reject a hypertechnical or semantic parsing of the language variations found in most arbitration clauses. Instead, the trend is first to determine first whether the clause is broad or narrow in a general sense and then to apply a concomitant presumption. See, e.g.,. Louis Dreyfus Negoce S.A., 252 F.3d at 225-226; WorldCrisa Corp., 129 F.3d at 75-76; Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Ltd., 1 F.3d 639, 641-642 (7th Cir. 1993); J.J. Ryan Sons, Inc. v. Rhone Poulenc Textile, S. A., 863 F.2d 315, 321 ((4th Cir. 1988). The court follows this trend.
In cases where the language contained in the instant arbitration clause has been considered, each court has concluded that the clause was broad. Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 721 (9th Cir. 1999); Coors Brewing Co. v. Molson Breweries, 51 F.3d 1511, 1516 (10th Cir. 1995) ; J.J. Ryan Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 319-321 (4th Cir. 1988); see also Good(E) Bus. Sys., Inc. v. Raytheon Co., 614 F. Supp. 428 (W.D. Wisc. 1985). Accordingly, all disputes among the parties are arbitrable unless the plaintiff can show with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Long, 248 F.3d at 315; WorldCrisa Corp., 129 F.3d at 74. This the plaintiff cannot do.
The plaintiff first claims that the defendants tortiously interfered with its NADA contract by inducing the Executive Committee of NADA to terminate the contract without cause. This claim is clearly within the scope of the parties' arbitration clause. See J.J. Ryan Sons, Inc., 863 F.2d at 319-321 ; P P Industries, Inc. v. Sutter Corp., 179 F.3d 861, 871 (10th Cir. 1999); Sweet Dreams Unlimited, Inc., 1 F.3d at 643. Since the factual allegations and underlying legal theory supporting the intentional interference claim require a finding that NADA did in fact breach the contract by terminating it without cause, CMI, Inc. v. Intoximeters, Inc., 918 F. Supp. 1068, 1079 (W.D.Ky. 1995) (applying Kentucky law), this claim touches on the contract between the plaintiff and NADA.
Additional evidence of the connection between the breach of contract claims pending in arbitration against NADA and the intentional interference claims pending against the individual defendants here is that the plaintiff seeks $29 million in damages in each case.
The plaintiff's collection claims are also within the scope of the parties' arbitration clause. The factual allegations made by the plaintiff to support these claims are that the defendants have together failed to pay over $100,000 in overdue balances and that the defendants' unwillingness to pay these balances in full immediately has motivated them to induce NADA to terminate the contract without cause. Thus, the factual allegations underlying the plaintiff's collection claims have created a significant relationship between those claims and the underlying contract.
The record also discloses that the collections claims are significantly related to the contract by virtue of the parties' practices in determining members' rebates under the contract. In a letter dated December 14, 2000, the plaintiff's Vice President of Sales Marketing, Mark E. Fiedler, indicates that the plaintiff began a practice of allowing members — such as the defendants here — to apply their rebates under the contract to their past due balances. This practice, along with the defendants' counterclaims that the plaintiff has breached the contract by unilaterally changing the way rebates are calculated, indicates that the plaintiff's collection claims will inevitably touch on matters addressed in the parties' contract. A plausible interpretation of the arbitration clause, therefore, would bring the collections claims within its scope, thus subjecting those claims to arbitration.
III. Did the defendants waive their right to arbitrate?
Because of the strong federal policy favoring arbitration, doubts will be resolved against a party asserting an affirmative defense to arbitration "whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Mem. Hosp., 460 U.S. at 24. To establish that the defendants waived their right to arbitrate, the plaintiff must prove that they knew of their right to arbitrate, yet took actions inconsistent with such right to the plaintiff's prejudice. Hoffman Constr. Co of Oregon v. Active Erectors Installers, Inc., 969 F.2d 796, 798 (9th Cir. 1992).
Time and money spent in litigation after refusing to arbitrate does not qualify as the type of prejudice that will predispose a court to find waiver, since a party resisting arbitration must bear the risk that arbitration will ultimately be ordered. Britton v. Co-Op Banking Group, 916 F.2d 1405 (9th Cir. 1986). Waiver is found only because a party has substantially invoked judicial processes to the detriment of the other party. See S R Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80, 83 (2nd Cir. 1998) (arbitration waived after fifteen months of litigation activity, including discovery); Morewitz v. West Englan Ship Owners Mut. Protection Indem. Ass'n, 62 F.3d 1356, 1366 (11th Cir. 1995); Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 (5th Cir. 1986).
The defendants have not substantially invoked this court's processes to the prejudice of the plaintiff. The only steps the defendants have taken are removal of the action and filing an answer and counterclaims. As a matter of law, this is insufficient to constitute waiver. See Germany v. River Terminal Railway Co., 477 F.2d 546, 547 (6th Cir. 1973); Hercules Company, LTD v. Beltway Carpet Service, Inc., 592 A.2d 1069, 1070-71 (D.C.App. 1991). Accordingly,
IT IS ORDERED that the defendant's motion to dismiss, or, alternatively, to stay (No. 12) this action is GRANTED. This action is DISMISSED WITHOUT PREJUDICE pursuant to 9 U.S.C. § 3.