Opinion
CIVIL NO. 99-5551 (JBS).
April 26, 2000
Vincent T. Cieslik, Esquire, Cahill, Wilinski Rhodes, Haddonfield, New Jersey, Attorney for Plaintiff.
Harry A. Horwitz, Esquire, Stevens Lee, Cherry Hill, New Jersey, Attorney for Defendant.
O P I N I O N
The matter before the court in this action based on diversity is defendant's motion for summary judgment seeking an order to compel arbitration and to dismiss these proceedings. The defendant, FCI USA, Incorporated, seeks relief based on an arbitration clause of a service agreement that it entered into with the plaintiff, TAI Corporation, and pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the "Act" or "FAA"). The plaintiff opposes the motion, alleging that its fraud claim falls outside of the scope of the arbitration clause. The plaintiff further alleges that the defendant waived its right to demand arbitration, first by filing pleadings in state court, and second, by failing to demand arbitration within a "reasonable time" as required by the agreement. For the reasons discussed below, the court grants the defendant's motion to compel arbitration and dismisses these proceedings.
I. BACKGROUND
The plaintiff, TAI Corporation ("TAI"), is a New Jersey corporation that offers promotion and sales services. The defendant, FCI USA, Incorporated ("FCI"), is a New York corporation which manufactures consumer and industrial electronic equipment and components. The defendant, then known as Bundy Corporation, entered into a "Sales Rep Agreement" ("the Agreement") with the plaintiff, made effective on February 1, 1993, which appoints the plaintiff as the defendant's "Exclusive Sales Representative" for various electronic components in selected "territories" in the Northeast, including certain counties of New Jersey and Pennsylvania and the entire State of Delaware. (See Agreement at 1, ¶ 1(a), Schedules A B Attached). The Agreement further contains the following arbitration clause:
Pursuant to Local Civil Rule 56.1 of the U.S. District Court, District of New Jersey, the parties have submitted Statements of Material Fact as to Which There Does Not Exist a Genuine Issue of Fact. Unless otherwise noted, the parties have stipulated to the facts contained in this opinion.
17. ARBITRATION
All claims and disputes relating to this Agreement shall be subject to arbitration in accordance with the Rules of the American Arbitration Association. Written notice of demand for arbitration shall be filed with the other party and the Association within a reasonable time after the dispute has arisen. Such arbitration shall be held at the Association's offices in New York, New York.
Agreement at 5-6, ¶ 17. Apparently, the relationship between the parties ended sometime in September of 1998, when the defendant terminated the plaintiff's services. (See Pl.'s Am. Compl. at 2, ¶ 7.)
The plaintiff filed an Amended Complaint with the Superior Court of New Jersey, Burlington County, in June of 1999, alleging that the defendant terminated the plaintiff's exclusive sales representative status in violation of the Agreement. (Id. at 2-3). The plaintiff sought compensatory and punitive damages under various theories of recovery including breach of contract, fraud, tortious interference with contractual relationships, and negligence. (Id. at 3-10.) On September 16, 1999, the defendant moved to dismiss the Amended Complaint for failure to state a claim upon which relief could be granted. The Superior Court of Burlington County partially granted the defendant's motion, dismissing plaintiff's claims for negligence and punitive damages.
The defendant then filed an Answer and Counterclaim on November 1, 1999. In it, the defendant stated at paragraph two (2) under its Affirmative Defenses that "[c]laims sued upon are subject to determination by arbitration pursuant to the contractual agreement of the parties." (Def.'s Answer Countercl. at 6, ¶ 2.) The defendant further stated in the introductory paragraph under its Counterclaims that it was pursuing its counterclaims "without waiving its arbitration rights." (Id. at 7.) On November 11, 1999, the defendant moved to compel arbitration of the remaining claims in the Superior Court of Burlington County.
On November 24, 1999, the defendant removed the case to this court. On December 9, 1999, the defendant filed the present motion, and the plaintiff filed a Brief in Opposition on January 5, 2000.
II. DISCUSSION
The defendant now moves for summary judgment, requesting that this court dismiss these proceedings and enter an order compelling arbitration as provided by the arbitration clause of the Agreement and under section two of the FAA. (See Def.'s Br. Reply Br.) In opposition, the plaintiff argues that the arbitration clause does not apply to its fraud in the inducement claim. (Pl.'s Br. in Opp'n at 13-16.) The plaintiff further argues that the defendant has waived its right to arbitrate all of its claims when it filed pleadings in state court, and because the defendant otherwise failed to comply with the Agreement's requirement of filing within a "reasonable time." (See id. at 8-13.)
Section two of the FAA provides, in pertinent part:
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.9 U.S.C. § 2.
The plaintiff also moved, in the event that the clause is upheld, for this court to enter an order requiring that arbitration take place in New Jersey, rather than in New York as stipulated in the Agreement, on the basis that it is would be prejudiced by having to arbitrate in New York. (Pl.'s Br. in Opp'n at 16-19.) Because the defendant has agreed to arbitrate in New Jersey (Def.'s Reply Br. at 11), it is unnecessary to point out that a federal court will not, as a general matter, modify express contractual terms entered into by sophisticated business parties based solely on alleged equitable principles. See , e.g . , Frank Brisco Co., Inc. v. Travelers Indemnity Co . , 65 F. Supp.2d 285, 311 (D.N.J. 1999).
A. Plaintiff's Fraud Claim Is Arbitrable
Summary judgment is appropriate when the materials of record "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A dispute is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the non-moving party." See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is "material" only if it might affect the outcome of the suit under the applicable rule of law.Id. Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment. Id.
The court will first address whether there is any basis to sever plaintiff's Count IV fraud in the inducement claim from those that the parties agree are arbitrable. The plaintiff argues that this claim is not the "type of claim" that the Agreement contemplates should be submitted to arbitration. (See Pl.'s Br. in Opp'n at 13-16). The plaintiff cites New Jersey case law for its assertion that in order to arbitrate a fraud in the inducement claim, the arbitration clause must consist of "any dispute, claim or controversy" language not qualified by the "relating to this Agreement" language found here. (Id. 13-16.) The plaintiff specifically argues that "relating to this Agreement" operates as a qualification to the extent that the Agreement envisions only contract theories of recovery, and is insufficient as a matter of law to bring fraud in the inducement claims within its purview. (Id. at 15.) Defendant responds simply by stating that a fraud claim is properly arbitrable since it relates to the Agreement. (Def.'s Reply Br. at 10-11.)
The FAA creates "a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act."Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983); John Hancock Mutual Life Ins. Co v. Olick, 151 F.3d 132, 136 (3d Cir. 1998). The purpose behind the Act is to ensure that courts enforce parties' decisions, as evidenced by contractual agreements, to resolve disputes through arbitration. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625-626 (1985). Thus, federal law determines whether an issue governed by the FAA is referable to arbitration, see Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 401-03 (1967); Harris v. Green Tree Financial Corp., 183 F.3d 173, 178-79 (3d Cir. 1999), and questions concerning the interpretation and construction of arbitration agreements are determined by reference to federal substantive law. Harris, 183 F.3d at 179 (3d Cir. 1999); Hartford Lloyd's Ins. Co. v. Teachworth, 898 F.2d 1058, 1061 (5th Cir. 1990) (citing Southland Corp. v. Keating, 465 U.S. 1, 12 (1984)).
In interpreting such agreements, federal courts may apply state law, and generally applicable contract defenses may be applied to invalidate arbitration agreements without contravening the FAA. Harris, 183 F.3d at 179 (citing Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). However, once the court finds an arbitration clause a valid and enforceable agreement, it must refer questions regarding the enforceability of the terms of the underlying contract to an arbitrator.Prima Paint Corp., 388 U.S. at 395; Harris, 183 F.3d at 179. Thus, the district court conducts a limited review of the agreement "to ensure that the dispute is arbitrable — i.e., that a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of that agreement." Olick, 151 F.3d at 137 (citing PaineWebber v. Hartmann, 921 F.2d 507, 511 (3d Cir. 1990)). "In conducting this limited review, the court must apply ordinary contract principles, with a healthy regard for the strong policy in favor of arbitration." Id. (citing Moses H. Cone, 460 U.S. at 24).
Applying these principles to the instant matter, the court first notes that the plaintiff does not dispute that it entered into a valid agreement, nor does it dispute that the arbitration clause itself is valid. The only question, therefore, is whether plaintiff's fraud in the inducement claim falls within the substantive scope of paragraph seventeen of the parties' Agreement. See Olick, 151 F.3d at 137.
The court finds that this question is well-settled under federal substantive law. In Prima Paint Corp. v. Flood Conklin Mfg. Corp., 388 U.S. 395 (1967), a case factually similar to the one before this court, the parties signed a "Consulting Agreement" containing an arbitration clause which stated that "any controversy or claim arising out of or relating to this agreement, or the breach thereof" would be submitted to arbitration. Id. at 398. One party alleged that there had been fraud in the inducement of the entire contract, though it did not allege fraud in the inducement of the arbitration clause itself in particular. Id. at 397-99. The United States Supreme Court held that under the statutory scheme of the FAA, the claimant's fraud in the inducement claim was subject to arbitration, absent an allegation that the arbitration clause itself was procured by fraud. Id. at 406-07. The Court reaffirmed its position years later in Moses H. Cone Memorial Hospital,supra, in which it stated that "as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . ." 460 U.S. at 24-25, quoted in Gruntal Co., Inc. v. Steinberg, 854 F. Supp. 324, 334 (D.N.J. 1994).
The Third Circuit agrees that fraud in the inducement claims are presumptively arbitrable. See Goodwin v. Elkins Co., 730 F.2d 99, 111 n. 23 (3d Cir. 1984) (noting that in Prima Paint Corp., the Supreme Court held that under the FAA, "an allegation of fraud in the inducement of the contract was properly submitted under that contract's broad arbitration provision, absent a showing that the arbitration clause itself was induced by fraud."); Merritt-Chapman Scott Corp. v. Pennsylvania Turnpike Comm'n, 387 F.2d 768, 771 (3d Cir. 1967).
Moreover, a survey of other circuits' decisions reveals that fraud in the inducement claims are submitted to arbitration as a matter of course. See , e.g . , Campaniello Imports, Ltd. v. Saporiti Italia, S.p.A . , 117 F.3d 655, 667-69 (2d Cir. 1997); Houlihan v. Offerman Co., Inc . , 31 F.3d 692, 695 (8th Cir. 1994); Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Ltd . , 1 F.3d 639, 642-43 (7th Cir. 1993).
The arbitration clause in this case requires that "[a]ll claims and disputes relating to this Agreement shall be subject to arbitration." (See Agreement at 5-6, ¶ 17.) Reading this provision "with a healthy regard for the strong policy in favor of arbitration," Olick, 151 F.3d at 137 (citing Moses H. Cone, 460 U.S. at 24), the court concludes that this language is sufficiently broad to include plaintiff's fraud in the inducement claim, since the plaintiff has not alleged that it was fraudulently induced into agreeing to the arbitration provision itself.
The court disagrees with the plaintiff that the "relating to this Agreement" language narrows the scope of arbitrable issues. Looking to federal substantive law for aid in interpretation and construction of arbitration clauses, see Southland Corp., 465 U.S. at 12, Harris, 183 F.3d at 179, the court could not uncover any case law which supports plaintiff's position. To the contrary, this language appears to be substantially similar to the language contained in the arbitration agreement reviewed by the Supreme Court in Prima Paint Corp. The Supreme Court found that the "any controversy or claim arising out of or relating to this agreement, or the breach thereof" language to be sufficiently broad to include such claims. 388 U.S. at 402-04. Similarly, in Stateside Machinery Co., Ltd. v. Alperin, 591 F.2d 234 (3d Cir. 1979), superseded on other grounds by statute, Judiciary Act Repealer Act, 1976 Pa. Laws 202, 348 § 2(a), the Third Circuit found "in a case of any unresolved issues" language contained in an arbitration clause "extremely broad" and to "encompass all issues" including the plaintiff's fraud in the inducement claim. Id. at 239-40.
Although the plaintiff cited New Jersey case law to support its position, the Agreement contains a governing law provision stating that "[t]his Agreement and any disputes relating thereto shall be construed under the laws of the State of New York." (Agreement at 7, ¶ 23.) Assuming, for the sake of argument, that the arbitration clause is to be interpreted under state law, the outcome of this matter would be the same, as New York courts expressly apply federal substantive law in interpreting arbitration clauses where interstate commerce is involved — as it is here. See Weinrott v. Carp , 344 N.Y.S.2d 848, 856 n. 2 (N.Y.App.Div. 1973); In re Rederi , 307 N.Y.S.2d 660, 661, 664 (N.Y.App. Div. 1970). Moreover, New York courts follow federal law in holding that fraud in the inducement claims are arbitrable absent an allegation that the arbitration provision itself was procured by fraud. See , e.g . , In re Arbitration Between Iron Workers Local Union No. 361 , 648 N.Y.S.2d 572, 572 (N.Y.App.Div. 1996); Stoianoff v. New American Library , 539 N.Y.S.2d 66, 66 (N.Y.App.Div. 1989); Henry v. Suffolk Home Distrib., Inc . , 500 N.Y.S.2d 265, 265 (N.Y.App.Div. 1986).
Other federal jurisdictions that have examined "relating to" or similar language contained in arbitration clauses agree that such language captures fraud in the inducement claims. See , e.g . , Dorton v. Collins Aikman Corp . , 453 F.2d 1161, 1170-71 (6th Cir. 1972) (clause providing that "any controversy arising out of or relating to this contract"); A. E. Plastik Pak Co., Inc. v. Monsanto Co . , 396 F.2d 710, 712-15 (9th Cir. 1968) (all disputes "arising out of or relating to" the agreement); In re Kinoshita Co., Ltd . , 287 F.2d 951, 953 (2d Cir. 1961) ("any controversy or claim arising out of or relating to this contract, of the breach thereof, shall be settled by arbitration"); Janmort Leasing, Inc. v. Econo-Car Int'l, Inc . , 475 F. Supp. 1282, 1291 (E.D.N.Y. 1979) ("any controversy or claim arising out of or relating to this Agreement, or breach hereof"); Cobb v. Network Cinema Corp . , 339 F. Supp. 95, 98 (N.D.Ga. 1972), rev'd on other grounds , 488 F.2d 41 (5th Cir. 1974) ("any controversy, dispute or question arising out of, in connection with, or in relation to this agreement").
In light of the above authority, the court finds the language of the arbitration clause in this matter to be sufficiently broad to include the plaintiff's claim. The court therefore finds no basis to sever plaintiff's Count IV Fraud claim and orders that it accompany plaintiff's other claims to arbitration.
B. The Defendant Has Not Waived Its Right to Arbitrate
The court now turns to the question of whether the defendant's conduct subsequent to the filing of the Amended Complaint in state court has, as a matter of law, waived the defendant's right to demand arbitration. The plaintiff, again relying upon New Jersey case law, first argues that defendant has waived its right to arbitrate when it answered plaintiff's Amended Complaint, asserted a Counterclaim, served a Request for Statement of Damages, and removed this action to federal court. (Pl.'s Br. in Opp'n at 8-11.) The plaintiff alleges that it has been prejudiced by defendant's request because it has begun its own "factual discovery" and trial preparation for state court. (Id. at 12-13.) The Defendant responds by asserting that its actions do not constitute waiver under federal or New York law, and that the plaintiff has not suffered any prejudice by its actions. (Def.'s Reply Br. at 1-4.)
The FAA establishes that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or like defense to arbitrability." Moses H. Cone Memorial Hospital, 460 U.S. at 24-25 (citations omitted and emphasis added); see also Pritzker v Merrill Lynch, Pierce, Fenner Smith, Inc., 7 F.3d 1110, 1114-15 (3d Cir. 1993). A party's waiver of its right to compel arbitration is "not to be lightly inferred" and only in the following circumstances: (1) when the parties have engaged in a lengthy course of litigation, (2) when extensive discovery has occurred, and (3) when prejudice to the party resisting the arbitration can be shown. Great Western Mortgage Corp. v. Peacock, 110 F.3d 222, 233-34 (3d Cir. 1997);Paine Webber Inc. v. Faragalli, 61 F.3d 1063, 1068-69 (3d Cir. 1995). "Prejudice is the touchstone for determining whether the right to arbitrate has been waived," and "[m]erely answering on the merits, asserting a counterclaim (or cross-claim) or participating in discovery, without more, will not necessarily constitute a waiver." Faragalli, 61 F.3d at 1069, 1069 n. 4.
In this matter, none of these factors has been shown. No lengthy course of litigation has taken place and no extensive discovery has occurred. The defendant's actions, in answering the plaintiff's Amended Complaint, asserting a Counterclaim, serving a Request for Statement of Damages, and removing this action to federal court, without more, do not rise to the level of waiver. See Faragalli, 61 F.3d at n. 4.
Moreover, the plaintiff has not shown how it has been prejudiced by the defendant's actions. The plaintiff alleges it will suffer prejudice because it has already "faced a Motion to Dismiss, filed additionally pleadings, prepared and served discovery requests, [in state court] and begun factual discovery." (Pl.' Br. in Opp'n at 12-13.) The court finds this argument unpersuasive both under the law and these facts. InHoxworth v. Blinder, Robinson Co., Inc., 980 F.2d 912, 926-27 (3d Cir. 1992), the Third Circuit set forth the following standard for measuring prejudice to a party arguing waiver in opposition to a motion to compel arbitration:
A determination of prejudice within the meaning of Gavlik[ Constr. Co. v. H.F. Campbell Co., 526 F.2d 777, 783 (3d Cir. 1975)] relevant to a finding of waiver of the right to arbitrate . . . incorporates not only the timeliness or lack thereof of a motion to arbitrate but also the degree to which the party seeking to compel arbitration has contested the merits of its opponent's claims; whether that party has informed its adversary of the intention to seek arbitration even if it has not yet filed a motion to stay the district court proceedings; the extent of its non-merits motion practice; its assent to the district court's pretrial orders; and the extent to which both parties have engaged in discovery (citations omitted).Id. Here, in its Answer, the defendant plead that "[c]laims sued upon are subject to determination by arbitration pursuant to the contractual agreement of the parties" and that it was pursuing its counterclaims "without waiving its arbitration rights." (Def.'s Answer Countercl. at 6-7.) The plaintiff faced a motion to compel arbitration in state court, and the defendant filed the present motion within a month of its removal to this court. The plaintiff was not prejudiced by the defendant filing pleadings in state court, especially since such pleadings put plaintiff on notice that defendant intended to pursue arbitration. In short, the plaintiff has failed to demonstrate any injury it will suffer by arbitrating its claims at this date.
It does not appear that the parties have engaged in any lengthy discovery. To the extent to which they have conducted discovery, however, it will not prejudice the plaintiff because the plaintiff can use discovered evidence before the arbitrator.
The plaintiff's last argument is that the defendant has waived it right to arbitration as a matter of contract because it failed to comply with the Agreement's requirement of filing within a "reasonable time." ((Pl.'s Br. in Opp'n at 11-16.) Relying on New Jersey case law, it asserts that the demand for arbitration is a "contractual condition precedent to arbitration which has not been met" and that demand cannot be reasonable as defendant has not filed a demand with the American Arbitration Association as required by the Agreement. (Id. at 12.) On the other hand, the defendant argues the question of whether demand for arbitration was made within a reasonable time is a procedural question to be decided by an arbitrator. (Def.'s Reply Br. at 8-9.) The court agrees with the defendant.
In questions concerning the interpretation and enforcement of arbitration agreements, the district court's role is limited to determining whether the agreement to arbitrate is valid and whether the dispute involved falls within the scope of the agreement. Olick, 151 F.3d at 137. Once the court finds an arbitration clause a valid and enforceable agreement, it must refer questions regarding the enforceability of the terms of the underlying contract to an arbitrator.See Prima Paint Corp., 388 U.S. at 395; Harris, 183 F.3d at 179. The issue of timeliness in connection with arbitration proceedings is a procedural one reserved for the arbitrator. Whittle v. Local 641, Int'l Bhd. of Teamsters, 56 F.3d 487, 490 n. 2 (3d Cir. 1995) (citing John Wiley Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)); National Iranian Oil Co. v. Mapco Int'l, Inc., 983 F.2d 485, 491 (3d Cir. 1992). Accordingly, the court leaves for the arbitrator the issue of a whether defendant's demand to arbitrate has been timely made according to the terms of the Agreement.
If — again for the sake of argument — this issue was controlled by state law, then the result would be the same, as New York courts hold that the issue of whether a party's demand to arbitrate is timely is a procedural question to be decided by the arbitrator. See , e.g . , In re Goldstein v. Goldstein , 625 N.Y.S.2d 252, 253 (App.Div. 1995); Policemen's Benevolent Ass'n of The Village of Spring Valley v. Rosenthal , 616 N.Y.S.2d 53, 54 (App.Div. 1994).
III. CONCLUSION
For the foregoing reasons, the court finds that plaintiff's fraud claim is properly arbitrable, that the defendant has not waived its right to arbitrate as a matter of law, and that any remaining issues will be resolved by the arbitrator. The defendant's motion for summary judgment will therefore be granted and these proceedings will be dismissed without prejudice to the parties' respective rights in arbitration. The accompanying Order is entered.
O R D E R
This matter having come before the court upon defendant's motion for summary judgment; and the Court having considered the parties' submissions; and for the reasons expressed in an Opinion of today's date;
IT IS this ___ day of April 2000 hereby
ORDERED that defendant's motion for summary judgment to compel arbitration be, and hereby is, GRANTED; and it is further
ORDERED that the parties submit their dispute to arbitration as provided by paragraph seventeen (17) of their agreement, which shall by agreement of the parties be convened in New Jersey; and it is further
ORDERED that the case be, and hereby is, DISMISSED without prejudice to the parties' respective rights in arbitration.