Opinion
Civil Action No. 02-2562-KHV
March 7, 2003
MEMORANDUM AND ORDER
This matter is before the Court on plaintiffs' Motion To Compel Arbitration (Doc. #5) filed January 10, 2003. For reasons stated below, the Court sustains plaintiffs' motion in part.
Factual Background
Ace International Furniture Rental Sales, Inc. ("Ace") formerly owned and operated several businesses, including K.C. Relocation, Ace Furniture, Mattress Factory Outlet, Mattress Liquidators and Ace International Furniture Rental Sales. In 1999, in order to purchase these businesses from Ace, Frank Dinovo formed Dinovo Investments, Inc. ("Dinovo"). Under an Asset Purchase Agreement ("APA") effective February 2, 2000, Dinovo acquired Ace's inventory, businesses and other assets. Stephen Housh ("S. Housh"), who owned 75 per cent of Ace, signed the APA as president and secretary of Ace. Charlotte Barksdale, who owned the remaining 25 per cent of Ace, signed the APA as an agent of Ace. S. Housh and Barksdale also signed personal guarantees which stated that they agreed to be bound by the APA as though they were the sellers. Cathy Housh ("C. Housh"), the wife of S. Housh, did not sign the APA, but she was an employee of Ace. Todd Housh ("T. Housh"), the son of S. Housh, did not sign the agreement, but he worked for Equifax and arranged certain credit card transactions for Ace accounts.
The APA states that it is "governed by the laws of the State of Kansas and any action to enforce the provisions of [the APA must] be brought in Wyandotte County Kansas." APA ¶ 19, attached as Exhibit 2 to defendants' Memorandum In Support Of Response To Motion To Compel Arbitration (Doc. #11) filed January 28, 2003 ("Defendants' Memorandum"). The APA also includes the following arbitration provision:
All controversies arising out of this agreement, or concerning the alleged breach hereof, except monetary claims for less than $200,000.00 shall be submitted to binding arbitration with the American Arbitration Association (the Association). Notwithstanding the provisions of this paragraph, either party may seek appropriate injunctive relief for any threatened conduct. The nonprevailing party shall bear the expenses in the arbitration proceeding, unless the arbitrator determines otherwise. Judgment upon the award rendered may be entered in any court of competent jurisdiction.
APA ¶ 29.
On February 1, 2002, Dinovo filed suit against S. Housh, C. Housh, T. Housh, Barksdale and Ace in the District Court of Wyandotte County, Kansas. See Petition, attached as Exhibit 3 to Defendants' Memorandum (Doc. #11). Dinovo asserted claims for breach of contract, fraud and conversion. On March 7 and April 19, 2002, S. Housh, C. Housh, Barksdale and Ace filed answers in state court. S. Housh and Ace also asserted counterclaims. On May 22, 2002, Dinovo replied to the counterclaims. During June and July, the state court held one or two brief status conferences. On August 7, 2002, S. Housh, C. Housh, T. Housh and Ace filed a motion to compel arbitration. Before the state court ruled on that motion, plaintiffs filed this action to compel arbitration of the state court claims. In state court, plaintiffs withdrew the motion to compel arbitration, but the case remains pending.
In a separate case in the District Court of Johnson County, Kansas, Barksdale filed suit against S. Housh, alleging that he had wrongfully retained certain assets which belonged to her. Neither party has sought arbitration of the Johnson County claims.
Specifically, Count I alleges that S. Housh breached the non-compete provision in the APA when he participated in operating another furniture sales and rental business. Count II alleges that S. Housh, Barksdale and Ace breached the APA when they misrepresented the financial condition of the businesses, required Dinovo to pay expenses incurred before the closing date and allowed credit card proceeds to be placed in their own accounts after the closing date. Count III alleges that S. Housh, Barksdale and Ace fraudulently misrepresented certain items in negotiating the APA. Under an unjust enrichment theory, Count IV alleges that S. Housh, Barksdale and Ace cannot equitably retain the purchase price of $1,802,058 or credit card proceeds received after the closing. Count V alleges that after the closing, S. Housh, T. Housh, Barksdale and Ace wrongfully converted credit card proceeds. Count VI alleges that before the closing, S. Housh, C. Housh, Barksdale and Ace converted credit card proceeds which belonged to Dinovo under the APA.
This action by Ace and the Housh plaintiffs seeks to compel arbitration of the Dinovo claims. Dinovo opposes arbitration, arguing that (1) its claims are outside the scope of the arbitration clause; (2) C. Housh and T. Housh were not parties to the arbitration agreement and claims against them are not subject to arbitration; (3) tort claims are not subject to arbitration under the Kansas Uniform Arbitration Act and (4) to the extent any claims are within the scope of the arbitration clause, plaintiffs waived their right to arbitration.
Analysis
I. Scope Of Arbitration Agreement
Plaintiffs urge the Court to compel arbitration under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. The FAA ensures that written arbitration agreements in maritime transactions and transactions involving interstate commerce are "valid, irrevocable, and enforceable." 9 U.S.C. § 2. Federal policy favors arbitration agreements and requires that the Court "rigorously enforce" them. Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 226 (1987) (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, (1985)); see Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001). "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
The question of arbitrability — whether the parties agreed to arbitrate a particular dispute — is an issue for judicial determination unless the parties clearly and unmistakenly provide otherwise. AT T Techs., Inc. v. Communication Workers Of Am., 475 U.S. 643, 649 (1986). The existence of an arbitration agreement "is simply a matter of contract between the parties; [arbitration] is a way to resolve those disputes — but only those disputes — that the parties have agreed to submit to arbitration." Avedon Eng'g, Inc. v. Seatex, 126 F.3d 1279, 1283 (10th Cir. 1997) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943-45 (1995); see PaineWebber Inc. v. Elahi, 87 F.3d 589, 594 (1st Cir. 1996) (arbitration is matter of contract law and party can only be made to submit to arbitration those disputes which he has so agreed to submit).
Where an agreement contains an arbitration provision, "a presumption of arbitrability arises." See ATT, 475 U.S. at 650. A party can overcome this presumption in two ways: (1) where an express provision excludes a particular claim from arbitration or (2) where the agreement lacks an express exception but the Court nonetheless concludes with "positive assurance" that the agreement does not cover the disputed issue. Id.; see Denhardt v. Trailways, Inc., 767 F.2d 687, 689 (10th Cir. 1985). Dinovo argues that the following claims are not covered under the APA: (1) claims which assert less than $200,000 in damages; (2) claims for injunctive relief; (3) claims for unjust enrichment; (4) claims against non-parties to the agreement such as C. Housh and T. Housh; and (5) tort claims.
A. Claims Less Than $200,000
Dinovo argues that the arbitration clause does not apply because its state court petition does not seek more than $200,000 on a single claim. Plaintiffs maintain that to determine whether the $200,000 threshold is satisfied, the Court should aggregate the relief requested in the six counts of Dinovo's petition. As explained above, the question whether the parties agreed to arbitrate a particular dispute is for judicial determination. See ATT, 475 U.S. at 649; see also Howsam v. Dean Witter Reynolds, Inc., ___ U.S. ___, 123 S.Ct. 588, 592 (2002) (disagreement whether arbitration clause applies to particular controversy is question for court). Accordingly, the Court must determine whether the parties intended to arbitrate closely related claims which individually do not seek over $200,000 but together seek more than that amount.
No party has argued that an arbitrator should decide this threshold question of arbitrability.
The arbitration clause provides that "[a]ll controversies arising out of this agreement, or concerning the alleged breach hereof, except monetary claims for less than $200,000.00 shall be submitted" to arbitration. The broad language "all controversies" implies that monetary claims may be aggregated to meet the $200,000 threshold. Such a broad clause is akin to arbitration clauses which agree to arbitrate all disputes "arising under" or "relating to" an agreement, which apply to even extra-contractual claims. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Brown v. Coleman Co., Inc, 220 F.3d 1180, 1184 (10th Cir. 2000); McDonnell Douglas Fin. Corp. v. Pa. Power Light Co., 858 F.2d 825, 832 (2d Cir. 1988); see also Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967) (broad arbitration clause compelled arbitration of fraudulent inducement claim); Black Veatch Int'l Co. v. Wartsila NSD N. Am., Inc., 1998 WL 953966 (D.Kan. Dec. 17, 1998) (breach of contract, negligence, negligent misrepresentation and fraud claims subject to agreement to arbitrate disputes arising "from or in connection with" contract).
The common and ordinary meaning of the term "claim," which is used in the plural in the parties' arbitration agreement, also suggests that prayers for monetary relief in Dinovo's petition should be aggregated. A legal claim is commonly defined as "[a]n interest or remedy recognized at law; the means by which a person can obtain a privilege, possession, or enjoyment of a right or thing; CAUSE OF ACTION." Black's Law Dictionary 240 (7th ed. 1999). A "claim" or "cause of action" generally connotes a natural grouping or common nucleus of operative facts. See Stanfield v. Osborne Indus., Inc., 263 Kan. 388, Syl. ¶ 5, 949 P.2d 602, 604 (1997); see also Plotner v. ATT Corp., 224 F.3d 1161, 1169 (10th Cir. 2000) (cause of action includes all claims or legal theories of recovery that arise from the same transaction, event or occurrence). "Among the factors relevant to a determination whether the facts are so woven together as to constitute a single claim are their relatedness in time, space, origin, or motivation, and whether, taken together, they form a convenient unit for trial purposes." Stanfield, 263 Kan. at 401, 949 P.2d at 611 (quoting Restatement (Second) of Judgments § 24, Comment b, p. 199). The six counts of Dinovo's petition arise from a single agreement or transaction and therefore constitute a single legal claim, as that term is commonly defined. Even if the petition asserts more than one claim, however, the arbitration agreement uses the term "claims" (plural), thus encompassing multiple claims which arise in whole or in part from the APA. At most, Dinovo has shown that the arbitration agreement is ambiguous whether multiple claims arising under the APA may be aggregated to meet the $200,000 threshold. Because all ambiguities are construed in favor of arbitration, see Moses H. Cone, 460 U.S. at 24-25, the Court must construe the arbitration agreement to permit aggregation.
In its state court petition, Dinovo does not request specific amounts of monetary damages. As to Counts I through IV, Dinovo seeks "in excess of $75,000, plus additional pre- and post-judgment interest that may accrue, [and] . . . attorneys' fees and costs incurred and expended." Count V seeks $85,000 for retained certain credit card payments. Count VI seeks $13,268 for charges which C. Housh billed to customers in advance, shortly before the sale.
Dinovo states that its petition includes overlapping damages, but except for Counts V and VI, Dinovo has not asserted that any individual count involves a monetary claim of less than $200,000. Dinovo's petition clearly seeks over $200,000 in damages. Dinovo seeks damages for the following conduct:
See Affidavit Of Frank Dinovo ¶ 18, attached as Exhibit 1 to Defendant's Memorandum (Doc. #11).
See Petition ¶ 22 ("Stephen Housh represented to plaintiff that revenue from [K.C. Relocation] would increase by approximately $20,000 per month in the months after closing because of growth in accrued placement fees. In reality, K.C. Relocation had never received a single placement fee, and to receive any placement fees, [Dinovo] would have to invest in excess of $100,000 to implement a business plan.")
See Petition ¶¶ 19-20 (S. Housh and Ace represented that expenses incurred during the last six months of 1999 were typical and did not allow Dinovo to see financial information for January 2000 before closing; "[a]verage monthly operating expenses increased from approximately $175,000 during the last six months of 1999 to approximately $215,000 in January 2000).
B. Dinovo's Claim For Injunctive Relief
Dinovo's petition seeks to enjoin S. Housh from future violations of the non-compete clause in the APA. See Petition, Count I. Dinovo argues that the arbitration clause excludes its claim for injunctive relief. Plaintiffs respond that Dinovo's request for equitable relief is inconsistent with its request for damages on the same count. The Court disagrees. Dinovo seeks money damages for violation of the non-compete clause and injunctive relief to prevent future violations. Plaintiffs have not shown that Dinovo's claim for injunctive relief falls under the arbitration agreement. Accordingly, the Court overrules plaintiffs' motion to compel arbitration on Dinovo's claim for injunctive relief, in Count I.
C. Claim For Unjust Enrichment
Under an unjust enrichment theory, Count IV of Dinovo's petition alleges that because S. Housh, Barksdale and Ace misrepresented the value of the businesses, the purchase price did not represent the fair value of the assets sold and the converted credit card proceeds belonged to Dinovo, they should not retain the $1,802,058 purchase price or credit card proceeds received after the closing. Dinovo argues that its claim for unjust enrichment does not arise under the APA because the claim assumes — indeed requires — the absence of an agreement. Dinovo correctly states the general rule, but ignores the fact that the state court petition (including the count for unjust enrichment) specifically alleges the existence of a valid agreement and that Dinovo paid the negotiated purchase price of $1,802,058 pursuant to that agreement. See Petition ¶¶ 9, 11, 24, 36-39. The claim for unjust enrichment, as framed by Dinovo, is therefore subject to arbitration because it arises out of the APA.
D. Non-Parties To Arbitration Agreement
Dinovo argues that it is not required to arbitrate its claims against C. Housh and T. Housh because they are not parties to the arbitration agreement. Ordinarily, a non-party to an arbitration agreement is not bound by the agreement. See ATT, 475 U.S. at 648 (arbitration is matter of contract and party cannot be required to submit to arbitration any dispute which it has not agreed to submit). Courts have carved limited exceptions to this rule for third party beneficiaries to a contract which contains an arbitration clause, successors-in-interest, or agents whom an arbitration clause was intended to benefit. See Britton v. Co-op Banking Group, 4 F.3d 742, 745-46 (9th Cir. 1993). C. Housh argues that she has a right to compel arbitration because she was an employee of Ace and she signed the APA. The initial paragraph of the APA does identify C. Housh as a shareholder of Ace, but she did not sign the agreement and even the reference to C. Housh as a shareholder of Ace is apparently erroneous. The Court therefore must determine whether her status as an Ace employee is sufficient for her to invoke the arbitration clause. Nothing in the agreement suggests that the arbitration clause was intended to benefit or bind employees or agents of Ace, other than S. Housh and Barksdale. See McCarthy v. Azure, 22 F.3d 351 (1st Cir. 1994) (to permit non-signatory agent to invoke arbitration clause, court required overt indication that parties intended to allow claims against agent in individual capacity); Bel-Ray Co., Inc. v. Chemrite (Pty) Ltd., 181 F.3d 435, 444 (3d Cir. 1999) (arbitration clause binding on non-signatory who would be bound by agreement under traditional principles of contract and agency law). Indeed, the arbitration clause states that "either party" may seek injunctive relief, thus suggesting that non-parties cannot invoke the arbitration clause. Therefore C. Housh cannot invoke the arbitration clause.
In addition, courts have permitted a non-signatory to invoke an arbitration agreement when a signatory to the agreement must rely on the agreement which contains the arbitration clause to assert claims against the non-signatory. See Grigson v. Creative Artists Agency, 210 F.3d 524, 527-28 (5th Cir. 2000). Plaintiffs have not argued that they meet this exception. Moreover, to prevail on its claims of conversion against C. Housh and T. Housh, Dinovo does not have to rely on the terms of the written APA. Courts also have permitted a non-signatory who is the alter ego of a signatory to assert rights under an arbitration agreement. See ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1460-61 (10th Cir. 1995). C. Housh and T. Housh have not shown that they meet this exception.
Plaintiffs argues that the APA covers C. Housh as an Ace employee. See Petitioners' Reply To Respondents' Response To Motion To Compel Arbitration (Doc. #12) filed February 20, 2003 at 14 (citing Letiza v. Prudential Bache Secs, Inc., 802 F.2d 1185 (9th Cir. 1986)). The Court disagrees. In Letiza, the securities company had "clearly indicated its intention to protect its employees" in the Customer Agreement which included the arbitration provision. Id. at 1188. The APA did not express a similar intent.
T. Housh argues that he has a right to arbitration because Dinovo accuses him of violating the APA, by wrongfully diverting credit card proceeds. Count V of the state court petition alleges that Ace, S. Housh and T. Housh converted credit card proceeds in violation of the APA, but T. Housh was not a party or an employee of a party to the APA. To prevail on its conversion claim against T, Housh, Dinovo does not need to rely on the APA. It can assert that independent of the APA, T. Housh converted credit card proceeds. Therefore T. Housh cannot invoke the arbitration clause.
For these reasons, the Court overrules plaintiffs' motion to compel arbitration as to Cathy Housh and Todd Housh. E. Dinovo's Tort Claims
The two conversion counts asserted against C. Housh and T. Housh also are asserted against S. Housh and Ace. Because the claims against S. Housh and Ace are subject to arbitration, the state court may decide to stay the claims against T. Housh and C. Housh pending arbitration. That decision of course is left to the discretion of the state court.
Dinovo does not deny that because the APA involves interstate commerce, the FAA normally would apply. Dinovo maintains that the scope of the arbitration clause should be governed by the Kansas Uniform Arbitration Act ("KUAA"), however, because the contract states that it is governed by the laws of the State of Kansas. The KUAA states that tort claims such as fraud and conversion are not subject to arbitration. See K.S.A. § 5-401(c). Plaintiffs respond that the FAA preempts conflicting state law, and that under the FAA, an agreement to arbitrate tort claims is enforceable. See 9 U.S.C. § 1 et seq.; see also Skewes v. Shearson Lehman Bros., 250 Kan. 574, 581, 829 P.2d 874, 879 (1992) (FAA permits arbitration of tort claims).
The FAA has no express pre-emption provision and it does not reflect a congressional intent to occupy the entire field of arbitration. See Volt Info. Scis., Inc. v. Bd. Of Trustees Of Leland Stanford Jr. Univ., 489 U.S. 468, 477 (1989). State law may nonetheless be pre-empted to the extent that it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Id. (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).
The FAA was designed to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts. Volt, 489 U.S. at 478. Congress "was motivated, first and foremost, by a congressional desire to enforce agreements into which parties had entered." Byrd, 470 U.S. at 220. Accordingly, the FAA allows parties who agree to arbitrate to exclude certain claims from the scope of their arbitration agreement or agree to follow state rules of arbitration. See Volt, 489 U.S. at 478. Absent a clear contractual intent to exclude certain claims or to follow a different substantive law, however, the FAA controls, with its presumption of arbitration. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59 (1995).
In Mastrobuono, an analogous case involving the question whether punitive damages were recoverable in arbitration, the Supreme Court held that
if contracting parties agree to include claims for punitive damages within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration.
Id. at 63. The Supreme Court also noted that the dispositive issue was whether the parties' contract allowed arbitration of punitive damages. See id. at 58. To resolve this issue, the Supreme Court looked to the contractual arbitration and choice of law provisions. See id. at 59-64. Here, the Court must likewise determine, based on the APA arbitration and choice of law provisions, whether the parties intended to submit tort claims to arbitration.
In Mastrobuono, the choice of law and arbitration provisions were contained in the same paragraph of Shearson Lehman's standard-form client agreement. See id. at 58. The first sentence of the paragraph provided, in part, that the entire agreement "shall be governed by the laws of the State of New York." Id. at 58-59. The second sentence provided that "any controversy arising out of the transactions between the parties shall be settled by arbitration in accordance with the rules of the National Association of Securities Dealers (NASD), or the Boards of Directors of the New York Stock Exchange and/or the American Stock Exchange." Id. at 59. The agreement contained no express reference to claims for punitive damages. Id.
Dinovo contends that the Kansas choice of law provision establishes that the parties intended to apply the KUAA (including its exclusion of tort claims). The Court, however, does not read the choice of law provision so broadly. The provision is reasonably read "as merely a substitute for the conflict-of-laws analysis that otherwise would determine what law to apply to disputes arising out of the contractual relationship." Mastrobuono, 514 U.S. at 59; see Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1213 (9th Cir. 1998) (Mastrobuono dictates that general choice-of-law clauses do not incorporate state rules which govern allocation of authority between courts and arbitrators). By itself, the clause does not reflect an intent to exclude tort claims from arbitration. See Mastrobuono, 514 U.S. at 60 (similar choice of law provision not unequivocal exclusion of punitive damages claims); Porter Hayden Co. v. Century Indem. Co., 136 F.3d 380, 383 (4th Cir. 1998) (general choice-of-law clause not unequivocal expression of parties' intent to commit adjudication of certain defenses to court, or, more generally, unequivocal expression of parties' intent to invoke state rather than federal arbitration law). At most, the choice of law provision introduces ambiguity into an agreement which would otherwise compel arbitration of tort claims. See Mastrobuono, 514 U.S. at 62. Because ambiguities as to the scope of the arbitration agreement must be resolved in favor of arbitration, see Moses H. Cone, 460 U.S. at 24-25, the choice of law provision does not establish the parties' intent to exclude tort claims from arbitration.
The text of the arbitration clause suggests that the parties did intend to submit tort claims to arbitration. As explained above, the arbitration clause includes "all controversies" arising out of the APA. The broad language of the arbitration clause implies that except for injunctive relief, the parties intended to submit to arbitration all claims over $200,000.
Read together, the arbitration and choice of law provisions compel arbitration of tort claims. To interpret the choice of law provision to include Kansas rules regarding arbitration would be inconsistent with the broad scope of the arbitration clause. In Mastrobuono, the Supreme Court explained:
respondents' reading of the [choice of law and arbitration] clauses violates another cardinal principle of contract construction: that a document should be read to give effect to all its provisions and to render them consistent with each other. See, e.g., In re Halas, 104 Ill.2d 83, 92, 83 Ill. Dec. 540, 546, 470 N.E.2d 960, 964 (1984); Crimmins Contracting Co. v. City of New York, 74 N.Y.2d 166, 172-173, 544 N.Y.S.2d 580, 583-84, 542 N.E.2d 1097, 1100 (1989); Trump-Equitable Fifth Avenue Co. v. H.R.H. Constr. Corp., 106 A.D.2d 242, 244, 485 N.Y.S.2d 65, 67 (1985); Restatement (Second) of Contracts § 203(a) and Comment b; id., § 202(5). We think the best way to harmonize the choice-of-law provision with the arbitration provision is to read "the laws of the State of New York" to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators. Thus, the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other. In contrast, respondents' reading sets up the two clauses in conflict with one another: one foreclosing punitive damages, the other allowing them. This interpretation is untenable.
Mastrobuono, 514 U.S. at 63-64. Absent a specific provision which exempts tort claims from arbitration or provides that the KUAA will govern the scope of issues subject to arbitration, the Court must find that the FAA controls and that Dinovo's claims of fraud and conversion are subject to arbitration.
As explained above, the arbitration clause in Mastrobuono provided that arbitration would be "in accordance with the rules of the National Association of Securities Dealers (NASD), or the Boards of Directors of the New York Stock Exchange and/or the American Stock Exchange." 514 U.S. at 59. Although the Supreme Court noted that NASD rules do not preclude an award of punitive damages, other courts have reached the same conclusion as Mastrobuono when interpreting arbitration clauses with no reference to specific arbitration rules. See Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130-31 (9th Cir. 2000); Porter Hayden Co. v. Century Indem. Co., 136 F.3d 380, 382-83 (4th Cir. 1998); see also UHC Mgmt. Co. v. Computer Scis. Corp., 148 F.3d 992, 996 (8th Cir. 1998) ("A number of post-Mastrobuono cases have interpreted that decision as similarly rejecting the notion that a general state choice-of-law clause appended to a contract that also includes an arbitration provision will preempt the applicability of the FAA in a federal court proceeding.").
Dinovo argues that the arbitration and choice of law provisions in this case are analogous to those in Volt, supra, where the Supreme Court held that where a contract included a general California choice of law provision, the FAA did not preclude application of California rules of arbitration regarding stays. See 489 U.S. at 474-77. In Volt, the Supreme Court affirmed a California court's interpretation that a general choice of law provision incorporated the state's procedural rules of arbitration. The Supreme Court reached this result in part because "[t]here is no federal policy favoring arbitration under a certain set of procedural rules" and the applicable state rules were "designed to encourage resort to the arbitral process." Id. at 476. Volt involved a procedural question regarding stays, not a substantive rule which restricts the scope of an otherwise valid arbitration agreement. In Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996), the Supreme Court distinguished Volt on a similar ground:
In addition, the applicable Kansas rule would not encourage arbitration, but rather would exclude all tort claims from arbitration. To apply the Kansas rule would undermine the purposes of the FAA.
The Montana Supreme Court misread our Volt decision and therefore reached a conclusion in this case at odds with our rulings. Volt involved an arbitration agreement that incorporated state procedural rules, one of which, on the facts of that case, called for arbitration to be stayed pending the resolution of a related judicial proceeding. The state rule examined in Volt determined only the efficient order of proceedings; it did not affect the enforceability of the arbitration agreement itself. We held that applying the state rule would not "undermine the goals and policies of the FAA," 489 U.S., at 478, 109 S.Ct., at 1255, because the very purpose of the Act was to "ensur[e] that private agreements to arbitrate are enforced according to their terms," id., at 479, 109 S.Ct., at 1256.
Doctor's Assocs., 517 U.S. at 688. In Mastrobuono, the Supreme Court also noted the distinct procedural posture of Volt:
In Doctor's Associates, the Supreme Court held that the FAA displaced Montana law which declared that arbitration agreements are unenforceable unless they include a specific notice on the first page of the contract.
The dissent makes much of the similarity between this choice-of-law clause and the one in Volt, which we took to incorporate a California statute, allowing a court to stay arbitration pending resolution of related litigation. In Volt, however, we did not interpret the contract de novo. Instead, we deferred to the California court's construction of its own state's laws. 489 U.S., at 474, 109 S.Ct., at 1253 ("the interpretation of private contracts is ordinarily a question of state law, which this Court does not sit to review"). In the present case, by contrast, we review a federal court's interpretation of this contract, and our interpretation accords with that of the only decision-maker arguably entitled to deference — the arbitrator.
Mastrobuono, 514 U.S. at 60 n. 4. In sum, the Court finds that under Mastrobuono, the general Kansas choice-of-law clause in the APA does not reflect an intent to displace federal law regarding arbitration or to limit the scope of the broad arbitration clause in the APA. Absent such contractual intent, the FAA pre-empts the KUAA provision which excludes tort claims from arbitration. Accordingly, the Court sustains plaintiffs' motion to compel arbitration as to Dinovo's fraud and conversion claims.
Dinovo also cites CL Ents., Inc. v. Citizen Band Potawatomi Indian Tribe Of Okla., 532 U.S. 411 (2001). In that case, the Supreme Court held that an Indian tribe had waived its immunity from suit in state court when it expressly agreed to arbitrate its disputes under Oklahoma law. The arbitration clause provided that arbitration would be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association and that judgment could be entered on any arbitration award in accordance with applicable law in any court having jurisdiction. See id. at 415. The contract also included a choice of law provision which stated that the contract would be governed by the law of the place where the project was located, i.e. Oklahoma. See id. The Supreme Court noted that by selecting Oklahoma law to govern the contract, the parties effectively consented to confirmation of the arbitration award under Oklahoma Uniform Arbitration Act ("OUAA"). See id. at 419.
CL Enterprises is distinguishable. In CL Enterprises, the Supreme Court relied on the portion of the arbitration clause which stated that an arbitration award could be reduced to judgment "in accordance with applicable law in any court having jurisdiction thereof." Id. at 419. CL Enterprises concluded that this clause, combined with the Oklahoma choice of law provision, established that as to enforcement of an arbitration award, the parties intended the OUAA to apply. This Court does not read CL Enterprises to express any opinion on the question whether the OUAA would govern if it excluded from arbitration claims which would otherwise fall under the broad arbitration clause. See id. at 1592 (arbitration clause covered "[a]ll claims or disputes . . . arising out of or relating to the Contract"). As to that question, which is the pertinent one in the instant case, Mastrobuono controls.
II. Waiver
Dinovo argues that plaintiffs waived their right to arbitration because they participated in state court litigation for five months before asserting their right to arbitration. Plaintiffs argue that based on the preliminary nature of the state court litigation, they did not waive their right to arbitration.
The parties have not addressed the preliminary question whether the waiver issue should be decided by the court or an arbitrator. As explained above, the question of arbitrability — whether the parties agreed to arbitrate a particular dispute — is an issue for judicial determination unless the parties clearly and unmistakenly provide otherwise. ATT, 475 U.S. at 649. The ambit of "questions of arbitrability" for a court to decide, however, is limited. The Supreme Court recently explained:
Linguistically speaking, one might call any potentially dispositive gateway question a "question of arbitrability," for its answer will determine whether the underlying controversy will proceed to arbitration on the merits. The Court's case law, however, makes clear that, for purposes of applying the interpretive rule, the phrase "question of arbitrability" has a far more limited scope. See [First Options of Chicago, Inc. v. Kaplan, 514 U.S. [938,] 942 [(1995)]. The Court has found the phrase applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.
Howsam v. Dean Witter Reynolds, Inc., ___ U.S. ___, 123 S.Ct. 588, 592 (2002). The Supreme Court further noted that the presumption is that the arbitrator, not a court, should decide allegations of waiver, delay or like defenses to arbitrability. See id. at 592 (citing Moses H. Cone, 460 U.S. at 24-25).
Here, the parties have not presented any evidence that they intended to submit the question of waiver to a court rather than an arbitrator. Because the APA is silent on the issue, the Court must apply the presumption that the waiver issue should be decided by an arbitrator. See Howsam, 123 S.Ct. at 592-93; Moses H. Cone, 460 U.S. at 24-25.
The Tenth Circuit has held that "[i]t is entirely appropriate in some instances for a district court to retain . . . jurisdiction of an arbitrable dispute where, because of conduct before the court, it may be deemed that a party is prevented on the basis of some equitable principle from asserting a right to arbitration." Reid Burton Constr. Inc. v. Carpenters Dist. Council of S. Colo., 535 F.2d 598, 604 (10th Cir.), cert. denied, 429 U.S. 907 (1976). Here, the facts surrounding the waiver issue involve primarily plaintiffs' conduct in the state court case. Therefore the Court declines to address the waiver issue.
IT IS THEREFORE ORDERED that plaintiffs' Motion To Compel Arbitration (Doc. #5) filed January 10, 2003, be and hereby is SUSTAINED in part. The Court overrules plaintiffs' motion as to Todd Housh and Cathy Housh and Count I of Dinovo's state court petition as to its request for injunctive relief. The motion is otherwise sustained.