Advanced Bodycare Solutions, LLC v. Thione Intern., No. 07-12309.

• Decision Date: 21 April 2008
• Docket Number: No. 07-12309.
• Citation: 524 F.3d 1235
• Parties: ADVANCED BODYCARE SOLUTIONS, LLC, Plaintiff-Appellee, v. THIONE INTERNATIONAL, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

524 F.3d 1235

ADVANCED BODYCARE SOLUTIONS, LLC, Plaintiff-Appellee, v. THIONE INTERNATIONAL, INC., Defendant-Appellant.

No. 07-12309.

United States Court of Appeals, Eleventh Circuit.

April 21, 2008.

Daniel Lawrence Wallach, Gary C. Rosen, Becker & Poliakoff, P.A., Fort Lauderdale, FL, for Defendant-Appellant.

H. Michael Muniz, Scott J. Topolski, Buckingham, Doolittle & Burroughs, L.L.P., Boca Raton, FL, for Plaintiff-Appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before BIRCH, PRYOR and KRAVITCH, Circuit Judges.

KRAVITCH, Circuit Judge:

In this interlocutory appeal we must decide whether the Federal Arbitration Act permits enforcement of a contract clause requiring an aggrieved party, prior to filing a lawsuit, to institute mediation or non-binding arbitration. We conclude it does not. Accordingly, we affirm the district court's order denying a stay pending arbitration.

I.

Advanced Bodycare International and Thione International Inc. are parties to a licensing agreement. The contract grants Advanced Bodycare exclusive rights to market and distribute Thione's nutritional supplements and a related testing kit, which purports to monitor the amount of free radical cells in the body. Pursuant to the contract, Advanced Bodycare ordered and paid for, and Thione shipped, a certain quantity of supplements and testing kits, which were delivered in September and December, 2004. According to the complaint Advanced Bodycare discovered that many of the testing kits were defective. It raised the issue with Thione, which, according to the complaint, eventually acknowledged a manufacturing defect and shipped some replacement units in October 2005, but not enough to replace all the defective kits. Thus, Advanced Bodycare alleges Thione is in breach of the contract.

The contract contains a provision specifying the procedures to be followed in the event of a dispute. It provides as follows:

A. The parties recognize that disputes as to certain matters may from time to time arise which relate to either party's rights and/or obligations hereunder. It is the objective of the parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish that objective, the parties agree to follow the procedures set forth below if and when such a dispute arises between the parties.

B. If any dispute arises between the parties relating to the interpretation, breach[,] or performance of this Agreement or the grounds for the termination thereof, and the parties cannot resolve the dispute within thirty (30) days of a written request by either party to the other party, the parties agree to hold a meeting, attended by the Chief Executive Officer or President of each party, to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If within sixty (60) days after such written request, the parties have not succeeded in negotiating a resolution of the dispute, such dispute shall be submitted to non-binding arbitration or mediation with a mutually agreed upon, independent arbitrator or mediator. The arbitration or mediation shall be held in Atlanta, Georgia. Each party shall bear its own costs and legal fees associated with such arbitration or mediation. If no resolution acceptable to both parties is reached through arbitration or mediation, either party may resort to instituting legal action against the other in court and all rights and remedies of the party shall be preserved in such action. This Agreement shall be interpreted in accordance with the laws of the state of Georgia.

Advanced Bodycare filed this suit in Florida state court in December 2006, alleging breach of contract and related state-law claims based on the defective test kits. It did not first seek arbitration or mediation. The complaint was amended and the case was then removed to the district court.¹ After removal, Thione moved to stay the suit pending arbitration pursuant to § 3 of the Federal Arbitration Act, 9 U.S.C. § 3 (FAA). The motion was denied in an order which is the subject of this appeal.

II.

Advanced Bodycare argues we lack appellate jurisdiction. It contends there is no appealable order, because the pertinent portion of the FAA's interlocutory appeal provision, 9 U.S.C. § 16(a)(1)(A), authorizes appeal only of "an order refusing a stay of any action under section 3 [of the FAA]," and a § 3 stay is available only where suit is brought upon an issue "referable to arbitration." 9 U.S.C. § 3. Advanced Bodycare argues this suit is not "referable to arbitration" because mediation and non-binding arbitration are not enforceable under the FAA. In other words, Advanced Bodycare claims that no matter how Thione captioned its stay motion, that motion was not really pursuant to § 3 because the contract does not require "arbitration" within the meaning of the FAA.

This argument merely duplicates the merits, and we reject it. That Thione might not be entitled to a § 3 stay on the merits hardly means it did not request one. It is undisputed that the parties entered an agreement which called for, inter alia, non-binding arbitration. Thus, Thione makes at least a colorable claim that there is an "agreement to arbitrate," 9 U.S.C. § 2, and hence that a § 3 stay is proper. A non-frivolous claim that the parties had an agreement to arbitrate, coupled with an order denying a stay, is sufficient to confer appellate jurisdiction. See Omni Tech Corp. v. MPC Solutions Sales LLC, 432 F.3d 797, 800 (7th Cir.2005). This approach is also consistent with the treatment of jurisdictional allegations in a complaint. A complaint alleging a colorable federal cause of action confers district court jurisdiction even if the complaint is ultimately dismissed for failure to state a claim. See Steel Co. v. Citizens for a Better Env't., 523 U.S. 83, 89, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (failure to state a federal claim does not defeat jurisdiction unless clearly frivolous or made only to allege federal jurisdiction). Because Thione made a non-frivolous motion for a stay pending arbitration and that motion was denied, we have jurisdiction.

III.

On the merits, we must decide if a contract under which disputes "shall be submitted to non-binding arbitration or mediation" is an agreement "to settle by arbitration a controversy," 9 U.S.C. § 2, thereby making the dispute "referable to arbitration," 9 U.S.C. § 3. If so, the district court erred in denying a stay, because when a dispute is arbitrable, entry of a § 3 stay is mandatory. See Klay v. All Defendants, 389 F.3d 1191, 1204 (11th Cir.2004).

This contract purports to require "mediation or non-binding arbitration." It is apparent that an aggrieved party had the option to initiate whichever procedure it preferred, because the contract contains no conditions requiring that one or the other procedure be invoked in certain circumstances. Although we could not locate any law on this point, we conclude that if either mediation or non-binding arbitration is not FAA "arbitration," this agreement is not enforceable under the FAA. When an aggrieved party has an unconditional right to choose between two or more dispute resolution procedures, and one of them is not FAA arbitration, the contract is not one "to settle by arbitration a controversy." 9 U.S.C. § 2. This is merely an application of the principle that arbitration is a creature of contract; a party may not be compelled to arbitrate if he did not agree to do so. Klay, 389 F.3d at 1201. When an aggrieved party may satisfy his contractual duties under a dispute resolution clause without undertaking arbitration, he has not obligated himself to settle the dispute by arbitration. So if either procedure specified in this contract is not "arbitration" under the FAA, we must affirm the order on appeal.

We come now to the substantive question: is mediation arbitration? When posed this way, the answer may seem obvious. But the FAA does not define its key term, "arbitration," and courts have had a difficult time defining just what types of procedures are enforceable under the statute. Because doubts about arbitrability are resolved in favor of arbitration, see Klay, 389 F.3d at 1201, and because a few district courts have decided on that basis that mediation contracts are enforceable under the FAA,² the issue merits close scrutiny.

This circuit has not enunciated a test for resolving whether a particular dispute resolution procedure is FAA "arbitration." One widely-followed opinion asks whether the parties have agreed to submit a dispute to a third party for a decision. AMF Inc. v. Brunswick Corp., 621 F.Supp. 456, 460 (E.D.N.Y.1985) (Weinstein, J.). Other authority considers how closely the procedure chosen resembles "classic arbitration" and whether enforcing it serves the intuited purposes of Congress. Fit Tech v. Bally Total Fitness, 374 F.3d 1, 6-7 (1st Cir.2004); Salt Lake Tribune Publ'g Co. v. Mgmt. Planning Inc., 390 F.3d 684, 689-90 (10th Cir.2004). These differing verbal formulations do not constitute a real disagreement, because submitting a dispute to a third party for a binding decision is quintessential "classic arbitration." See Salt Lake Tribune, 390 F.3d at 689 ("classic arbitration" is characterized by "empower[ing] a third party to render a decision settling [the] dispute"). Thus, when there is a dispute about whether any particular dispute resolution method chosen in a contract is FAA arbitration, we will look for the "common incidents" of "classic arbitration," including (i) an independent adjudicator, (ii) who applies substantive legal standards (i.e. the parties' agreement and background contract law), (iii) considers evidence and argument (however formally or informally) from each party, and (iv) renders a decision that purports to resolve the rights and duties of the parties,...