Matterhorn, Inc. v. NCR Corp.

• Decision Date: 06 June 1985
• Docket Number: No. 84-2789,84-2789
• Parties: MATTERHORN, INC., Plaintiff-Appellee, v. NCR CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 866

763 F.2d 866

MATTERHORN, INC., Plaintiff-Appellee, v. NCR CORPORATION, Defendant-Appellant.

No. 84-2789.

United States Court of Appeals, Seventh Circuit.

Argued April 19, 1985.

Decided June 6, 1985.

William J. Reinke, Barnes & Thornburg, South Bend, Ind., for plaintiff-appellee.

R. Davy Eaglesfield, III, Mishkin, Cromer, Eaglesfield & Maher, Indianapolis, Ind., for defendant-appellant.

Before ESCHBACH and POSNER, Circuit Judges, and SWYGERT, Senior Circuit Judge.

POSNER, Circuit Judge.

Matterhorn, Inc. brought a diversity suit against NCR Corporation (formerly National Cash Register) for breach of contract. NCR has filed an appeal, which raises a difficult issue of arbitrability, from the denial of its motion to compel Matterhorn to arbitrate the contract dispute, and to stay Matterhorn's lawsuit until the arbitration was completed. The motion was brought under 9 U.S.C. Sec. 4, which provides a federal remedy against refusing to arbitrate when required to do so by a written arbitration agreement, and also provides that if the making of the agreement or the refusal to perform it by submitting to arbitration is in issue the district court must try the issue before deciding whether to order the defendant to arbitrate; and under 9 U.S.C. Sec. 3, which empowers the court to stay any proceedings before it, pending arbitration.

The correctness of the district court's action depends on the proper interpretation of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), where the Supreme Court distinguished between a challenge to the arbitration clause itself and to the overall contract containing the arbitration clause, and held that only the former challenge is to be tried under section 4; the latter is to be referred to the arbitrator. So, for example, a challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, Schacht v. Beacon Ins. Co., 742 F.2d 386, 389-90 (7th Cir.1984), while a challenge based on the lack of mutuality of the arbitration clause would be for the court, Hull v. Norcom, Inc., 750 F.2d 1547, 1549-50 (11th Cir.1985). As Hull implies, although section 4 (so far as relevant here) speaks only of challenges to "the making" of the agreement to arbitrate, the term has been held to encompass any challenge to the validity of the agreement, even if there is no disagreement that it was "made."

The distinction between attacking the whole contract and just the arbitration clause may seem puzzling--the dissenting Justices in Prima Paint found it so, and the majority opinion did not elucidate it--but several points can be made in elucidation:

1. If a court had to resolve a challenge to the validity of the entire contract before the arbitration could begin, the arbitrator, though the parties' designated arbiter of disputes under the contract, would have much less scope for decision than a judicial arbiter of contract disputes.

2. An arbitration clause will often be "severable" from the contract in which it is embedded, in the sense that it may be valid even if the rest of the contract is invalid. If the agreement of one party to arbitrate disputes is fully supported by the other party's agreement to do likewise, there is no need to look elsewhere in the contract for consideration for the agreement to arbitrate; so objections to other parts of the contract, based on fraud or unconscionability or mistake or whatever, need not spill over to the arbitration clause. See Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 410-11 (2d Cir.1959), cert. dismissed, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960). This is not merely a formal point; it bears on the parties' intentions.

3. There would however be a severe problem of bootstrapping if a party to a contract could be forced to arbitrate the question whether he had been coerced or deceived into agreeing to arbitrate disputes arising under the contract.

In 1978 NCR and Matterhorn, in contemplation of Matterhorn's buying a computerized cash register for its restaurant, entered into a standard-form contract drafted by NCR and called the "Universal Agreement." (We omit some details of the transaction to simplify this opinion.) The Universal Agreement provided that it was to apply to anything that Matterhorn bought from NCR unless the Agreement was terminated in writing, that Matterhorn would order specific equipment by submitting a purchase order to NCR describing what it wanted, and that NCR's acceptance of the order would create a contract of sale consisting of the purchase order and the Universal Agreement. The Universal Agreement also provided that any dispute "arising out of or related to this Agreement and/or any contract hereafter entered into between NCR and Customer, or the breach thereof, or the furnishing of any equipment or service by NCR to Customer, shall be settled by arbitration."

As contemplated, shortly after the Universal Agreement was signed Matterhorn submitted a purchase order for a computerized cash register and NCR accepted the order. But a delay in filling it caused Matterhorn to cancel it. In January 1980, some nine months after the cancellation and 18 months after the signing of the Universal Agreement, NCR sent Matterhorn a new purchase order for the same cash register, though at a higher price. According to Matterhorn, NCR told it that it would have to sign the new order because the earlier "contract" had been cancelled. The purchase order contained two empty boxes. One had the following legend beside it: "FURNISHING OF EQUIPMENT, PROGRAMS AND/OR SERVICE IS DONE ONLY IN ACCORDANCE WITH AND PURSUANT TO OUR AGREEMENT DATED: U/A DATE ________________." The other said: "TERMS AND CONDITIONS ON REVERSE SIDE APPLY." Matterhorn signed the purchase order but did not check either box or fill in the blank for the date. NCR, when it received the order, checked the box for incorporation of the Universal Agreement and filled in the date of the Universal Agreement that Matterhorn had signed. The 1978 purchase order had contained the same boxes; only NCR had checked the Universal Agreement box (and filled in the date) before Matterhorn received and completed the order--had indeed checked both boxes.

The cash register was delivered, but according to Matterhorn malfunctioned, giving rise to this suit. When NCR moved for an order to arbitrate and for a stay pending arbitration, the district judge denied the motion on the ground that there was an issue whether the parties had agreed to arbitrate disputes under the 1980 purchase order and that the issue had to be tried before he could rule on the motion. NCR appealed, arguing that by denying a stay of an action at law the judge had refused to enjoin the action and thus that his order was immediately appealable under 28 U.S.C. Sec. 1292(a)(1), which makes orders granting or denying injunctions appealable though nonfinal. We dismissed the appeal as premature, Matterhorn, Inc. v. NCR Corp., 727 F.2d 629 (7th Cir.1984), because the judge had not definitely denied the stay; he had just decided that a trial was necessary before he could decide whether to grant or deny it. It was much as if NCR had tried to appeal from a denial of a motion for summary judgment on its claim for an injunction; such a denial--a preliminary procedural ruling--is not appealable. Switzerland Cheese Ass'n v. E. Horne's Market, Inc., 385 U.S. 23, 25, 87 S.Ct. 193, 195, 17 L.Ed.2d 23 (1966); see also Donovan v. Robbins, 752 F.2d 1170, 1172-74 (7th Cir.1985).

After the dismissal of NCR's appeal, a trial was held. The judge asked the jury to answer two questions: whether the parties in 1978 had entered into a "Universal Agreement" which included an arbitration clause, and whether the 1980 purchase order had incorporated the arbitration clause of the Universal Agreement. The jury answered the first question "yes," and the second "no," so the judge ruled that Matterhorn's breach of contract claim did not have to be arbitrated, and denied NCR's motions. NCR has appealed.

Although the judge's order does not wind up the litigation between the parties--quite the contrary, it sets the stage at long last for a determination of the merits of Matterhorn's breach of contract action, filed in 1982--and hence is not a final judgment, it nevertheless is appealable under the "Enelow-Ettelson " doctrine. This doctrine, on which see, e.g., Matterhorn, Inc. v. NCR Corp., supra, 727 F.2d at 630-33; Medtronic, Inc. v. Intermedics, Inc., 725 F.2d 440, 442-44 (7th Cir.1984); Hayes v. Allstate Ins. Co., 722 F.2d 1332, 1337-38 (7th Cir.1983) (dissenting opinion), allows the immediate appeal of an order granting or denying a stay sought on equitable grounds, provided the suit to be stayed is a suit at law (a suit for damages), which Matterhorn's suit is. Although as an original matter it is by no means clear that a stay of court proceedings pending arbitration is equitable in nature, see id. at 1339, countless decisions hold that it is. See, e.g., Shanferoke Coal & Supply Corp. v. Westchester Service Corp., 293 U.S. 449, 452, 55 S.Ct. 313, 314, 79 L.Ed. 583 (1935); H.C. Lawton, Jr., Inc. v. Truck Drivers, Chauffeurs & Helpers Local Union No. 384, 755 F.2d 324, 327 (3d Cir.1985).

Besides denying NCR's request for a stay pending arbitration, the judge denied its request for an order that Matterhorn arbitrate the dispute; and an order to arbitrate is not deemed an injunction. We must consider what if any bearing this fact has on our appellate jurisdiction in this case.

Despite its resemblance to a mandatory injunction, an order to arbitrate is assimilated rather to a procedural order, such as a discovery order. Hence making or refusing to make such an order is not appealable under section 1292(a)(1). See, e.g., Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 84-85 (2d Cir.1961) (Friendly, J.); County of Durham v....