Cobb v. Network Cinema Corp.

• Citation: 339 F. Supp. 95
• Decision Date: 01 March 1972
• Docket Number: Civ. A. No. 16134.
• Parties: Karlene H. COBB et al., Plaintiffs, v. NETWORK CINEMA CORP., Defendant.
• Court: U.S. District Court — Northern District of Georgia

339 F. Supp. 95

Karlene H. COBB et al., Plaintiffs, v. NETWORK CINEMA CORP., Defendant.

Civ. A. No. 16134.

United States District Court, N. D. Georgia, Atlanta Division.

March 1, 1972.

Coleman R. Rosenfield, Hallandale, Fla., Baxter L. Davis, Davis, Matthews & Quigley, Atlanta, Ga., Jerry S. Cohen, Herbert E. Milstein, Michael D. Hausfeld, Washington, D. C., A. Blenn Taylor, Jr., Taylor & Bishop, Brunswick, Ga., for plaintiffs; Harold E. Kohn, P. A., Philadelphia, Pa., of counsel.

Simon Rose, Phillips, Nizer, Benjamin, Krim & Ballon, New York City, E. Smythe Gambrell, Edward W. Killorin, Atlanta, Ga., for defendant.

SIDNEY O. SMITH, Jr., Chief Judge.

This suit arose over a franchise dispute between the named plaintiffs and the defendant who entered into New York contracts establishing "Jerry Lewis Cinemas" in designated territories in Georgia. Under the terms of each agreement, it was provided:

"ARBITRATION. Any controversy, dispute or question arising out of, in connection with, or in relation to this agreement or its interpretation, performance or nonperformance of any breach thereof shall be determined by arbitration conducted in New York City in accordance with the then existing rules of the American Arbitration Association, and judgment upon any award, which may include an award of damages, may be entered in the highest State or Federal court having jurisdiction. Nothing contrained herein shall in any way deprive the COMPANY of its right to obtain injunction or other equitable relief as previously set forth herein."

Following the inception of the controversies, the defendant has initiated proceedings for arbitration under the rules of the American Arbitration Association.

In the multi-count petition, the plaintiffs seek to move as a class on a broad front seeking damages on the following claims:

                COUNT I   — Anti-Trust Violations (Sherman Act)
                COUNT II  — Anti-Trust Violations (Clayton Act)
                COUNT III — Securities Act Violations (Sec. 22(a))
                COUNT IV  — Common-Law Fraud in inducement
                COUNT V   — Securities Act Violations (Sec. 17(a)
                                                                  10(b))
                COUNT VI  — Breach of Contract (UCC)
                COUNT VII — Breach of Contract (UCC)
                

By way of temporary relief, the plaintiffs presently seek to restrain and enjoin the New York arbitration proceedings. By way of response, the defendant denies plaintiffs' claims, asserts its right to proceed with arbitration; and seeks to stay this suit pending its outcome under the provisions of 9 U.S.C. § 3. The contest thus presents the somewhat complex question of the viability of a broad arbitration clause in the face of the alleged violations of public statutes.

1. Public-policy.

At the outset, plaintiffs contend that the arbitration proceedings must be enjoined and the broad arbitration clause declared void under the strong public policy of Georgia. The state courts have indeed expressed specific disapproval of such clauses. Thus,

"`According to numerous decisions a general agreement to arbitrate all questions which may arise in the execution of a contract, both as to liability and loss, should be treated as against public policy and void, as an attempt to oust the courts of jurisdiction.' State Hwy. Dept. of Georgia v. MacDougald Construction Co., 189 Ga. 490, 504, 6 S.E.2d 570, 578. More accurately stated, the rule which obtains in this state is that `A common-law agreement, ... to submit the validity and effect of a contract, or to submit all matters in dispute, to arbitration, may be revoked by either party at any time before the award.' Parsons v. Ambos, 121 Ga. 98, 101, 48 S.E. 696, 697. See also: Gettys v. Mack Trucks, Inc., 107 Ga.App. 694(2), 131 S.E.2d 205; 5 Am.Jur.2d 547-548, Arbitration and Award, § 36."

Wright v. Cecil A. Mason Constr. Co., 115 Ga.App. 729, 155 S.E.2d 725 (1967). New York has no such policy. To the contrary, it has a legislative policy in its favor. Moreoever, there is a strong national policy in favor of arbitration:

"Validity, irrevocability, and enforcement of agreements to arbitrate. A written provision in any maritime transaction or 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, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, 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 initial question presented, therefore, is whether this federal district court, sitting in this diversity case in Georgia is Erie-bound to follow the public policy of the state.

In this respect, the court is clearly bound by the federal policy. The issue was squarely ruled upon by the Supreme Court in the case of Prima Paint v. Flood & Conklin, 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). In the face of Erie, "the question is whether Congress may proscribe how federal courts are to conduct themselves with respect to subject matter over which Congress plainly has power to legislate. The answer to that can only be in the affirmative. And it is clear beyond dispute that the federal arbitration statute is based upon and confined to the incontestable federal foundations of `control over interstate commerce and over admiralty.'" (at 405, 87 S.Ct. at 1806-1807). Thus, as a procedural matter, the federal policy is beyond the reach of the state under Erie, and is to be enforced by this court if the circumstances are appropriate.

2. The securities question.

Plaintiffs rely heavily upon the securities counts and the leading case of Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), which holds that the non-waiver provisions of the Securities Act (15 U.S.C. § 77n) generally preclude arbitration as a forum for resolution of its violations. Cf. Brown v. Gilligan, Will & Co., 287 F.Supp. 766 (S.D.N.Y.1968). See also Shapiro v. Jaslow, 320 F.Supp. 598 (S.D.N.Y.1970). However, in order to invoke such authority, it is first necessary to establish that the franchise in question is a security within the meaning of the Act. 15 U.S.C. § 77b(1). Of the several items listed, only "investment contract" seems to be possibly applicable as "franchise" itself is not expressly mentioned therein.

The Supreme Court and this circuit clearly define "an investment contract for purposes of the Securities Act" as "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." S.E.C. v. W. J. Howey Co., 328 U.S. 293 at 299, 66 S.Ct. 1100 at 1103, 90 L.Ed. 1244 (1946); Roe v. United States, 287 F.2d 435 at 438 (5th Cir. 1961), cert. den. 368 U.S. 824, 82 S.Ct. 43, 7 L.Ed.2d 29 (1961). In an exhaustive opinion, it has recently been correctly concluded that franchise agreements of the type under investigation do not constitute "investment contracts" and are beyond the ambit of the Securities Act. Mr. Steak, Inc. v. River City Steak, Inc., 324 F. Supp. 640 (D.Colo.1970). See also Chapman v. Rudd Paint & Varnish Company, 409 F.2d 635 (9th Cir. 1969). Under recognized standards, it is plain to the court that the contract here does not rely solely on the efforts of others and consequently is not a protected security under the Act.¹ It follows that plaintiffs cannot proceed in either forum, court or arbitration, under Counts III and V, and they must be dismissed.

3. The fraud and contract claims.

The remaining issues involve a determination of whether the other claims are "of a character inappropriate for enforcement by arbitration." See Wilko v. Swan, 201 F.2d 439 at 444 (2d Cir. 1953). The gravamen of plaintiffs' complaint is that the whole scheme was infected by fraud and this is expressed in Counts IV, VI, and VII and to some extent in the anti-trust claims under Count II. Where such attacks are made on contracts containing broad arbitration clauses, the courts have uniformly held such questions appropriate for the arbitration process. Prima Paint Corp. v. Flood & Conklin, 388 U.S. 395, 87 S. Ct. 1801, 18 L.Ed.2d 1270 (1967); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir. 1959), cert. granted 362 U.S. 909, 80 S.Ct. 682, 4 L. Ed.2d 618, dismissed under Rule 60, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960); A & E Plastik Pak Co. v. Monsanto Company, 396 F.2d 710 (9th Cir. 1968). Likewise formal claims for breach of contract are subject to arbitration. Indeed they are the normal subject-matter of such proceedings. Southeastern Enameling Corp. v. General Bronze Corp., 434 F.2d 330 (5th Cir. 1970). More specifically, fraud, damages, trade-mark and similar claims arising out of licensing and distributorship agreements are appropriate for arbitration under a broad clause. E. g. Necchi Sewing Machine Sales Corp. v. Sewline Company, 194 F.Supp. 602 (S.D.N.Y. 1960); Saucy Susan Products, Inc. v. Allied Oil English, Inc., 200 F.Supp. 724 (S.D.N.Y.1961). It is apparent therefore, having once determined the validity of the arbitration clause itself, that the court should not stay arbitration on the basis of the claims asserted in the fraud and contract counts. (IV, VI, and VII). To the contrary, arbitration should proceed unless barred by consideration of the anti-trust claims.

4. The Anti-Trust claims.

This question has several sides, including not only the issue of whether such claims are arbitrable; but, if not, whether the court should stay its action thereon pending arbitration of the other claims or enjoin the arbitration until the anti-trust issues are resolved. The answer to neither is certain.

While the Supreme Court has apparently not expressed itself on the antitrust issue, there has generated a considerable body of authority in the area. By a...