Collins & Aikman Products Co. v. Building Systems, Inc.

• Decision Date: 15 June 1995
• Docket Number: D,No. 1577,1577
• Citation: 58 F.3d 16
• Parties: COLLINS & AIKMAN PRODUCTS CO., Plaintiff-Appellee, v. BUILDING SYSTEMS, INC. and U.S. Commercial Floor System, Defendants-Appellants. ocket 94-9229.
• Court: U.S. Court of Appeals — Second Circuit

Page 16

58 F.3d 16

COLLINS & AIKMAN PRODUCTS CO., Plaintiff-Appellee, v. BUILDING SYSTEMS, INC. and U.S. Commercial Floor System,

Defendants-Appellants.

No. 1577, Docket 94-9229.

United States Court of Appeals, Second Circuit.

Argued April 21, 1995.

Decided June 15, 1995.

Vilia B. Hayes, New York City (Norman C. Kleinberg, Andrea de Gorgey, Hughes Hubbard & Reed, of counsel), for plaintiff-appellee.

John M. Aerni, LeBoef, Lamb, Greene & MacRae, New York City (William N. Kammer, Gray Cary Ware & Freidenrich, San Diego, CA, of counsel), for defendants-appellants.

Before: ALTIMARI, JACOBS and CALABRESI, Circuit Judges.

JACOBS, Circuit Judge:

Defendants-appellants Building Systems, Inc. ("BSI") and U.S. Commercial Floor System filed a Statement of Claim with the American Arbitration Association in New York City, alleging wrongful termination of contract and six more enumerated claims against Collins & Aikman Product Co. ("C & A"), a distributor of floor coverings for which BSI had served as sales representative. C & A promptly commenced a special proceeding in New York State Supreme Court, seeking to stay arbitration in respect of all claims other than the one designated as wrongful termination of contract, and won a temporary stay of arbitration pending a hearing on the petition. Soon thereafter, BSI removed the action to federal court, on grounds of diversity, and moved for an order compelling BSI to submit to arbitration on all seven of its claims. After briefing and oral argument, the United States District Court for the Southern District of New York (Sprizzo, J.) entered judgment granting BSI's motion to compel arbitration as to the wrongful termination claim, but denying the motion as to the rest; and (in mirror image) denying C & A's petition to stay arbitration as to the wrongful termination claim, but granting the petition as to the rest. Defendants filed a timely notice of appeal (although defendant U.S. Commercial System thereafter withdrew from the appeal). We have jurisdiction and, after consideration of all arguments presented on appeal, we affirm in part and in part vacate and remand.

Background

C & A is in the business of marketing floor coverings. In 1977, C & A entered into two substantially similar contracts with BSI (the "1977 Contracts" or the "Contracts"), providing that BSI would be C & A's sales representative in respect of (1) sales to the Church of Jesus Christ of the Latter Day Saints, throughout the United States, and (2) all sales in a multi-state area referred to by the parties as the Rocky Mountain Region. BSI committed itself to use its best efforts to promote and sell C & A products and to avoid promoting or selling any competing products, and C & A in return agreed to pay commissions to BSI. The 1977 Contracts each contained an arbitration clause:

Any claim or controversy arising out of or relating to this agreement shall be settled by arbitration in the City of New York in accordance with the Rules then obtaining of the American Arbitration Association.

The sole issue in the appeal is the scope of this clause.

The commercial relationship between BSI and C & A was uneventful until early 1988; BSI promoted and sold C & A's products and C & A paid commissions, all in accordance with the Contracts. In or around January 1988, C & A initiated negotiations to acquire BSI in order to bring in-house the promotional and sales services provided by BSI under the Contracts. Supposedly in aid of that transaction, C & A sought information about BSI's business, including customer information and other matters that BSI deemed proprietary. At BSI's request, C & A executed a one-page confidentiality agreement on January 13, 1988 (the "1988 Agreement"), which provides that any business information furnished by BSI would be kept confidential and would not be used for any purpose other than the acquisition talks. The term of the Agreement was two years. The 1988 Agreement did not contain an arbitration provision, nor did it refer to or incorporate the 1977 Contracts.

The acquisition talks lasted for some time, but the transaction never materialized. On July 11, 1990--several months after the 1988 Agreement terminated in accordance with its own terms--C & A gave 30 days' notice by letter of its intent to terminate the 1977 Contracts, and specifying the grounds for the termination. The Contracts were accordingly terminated on August 11, 1990.

In its October 1993 demand for arbitration, BSI alleges that C & A never intended to acquire BSI, and that the 1988 negotiations were a ruse on C & A's part to obtain BSI's proprietary business information so that C & A could take over the roles that BSI performed under the 1977 Contracts. BSI contends that C & A's scheme also involved enticing BSI employees to come to work for C & A, and that C & A defamed BSI's installer network in order to attract customers away from BSI.

In BSI's Statement of Claim, these allegations are expressed as seven causes of action, which we renumber for convenient reference in this opinion:

(1) wrongful termination of the 1977 Contracts, causing damages of $4,250,000;

(2) fraud in obtaining proprietary information through the 1988 Agreement, allowing C & A to obtain BSI's business without incurring the costs of a buyout;

(3) fraud in the inducement of the 1988 Agreement, for which BSI demands rescission of the Agreement;

(4) breach of C & A's implied duty of good faith and fair dealing in respect of both the 1977 Contracts and the 1988 Agreement, causing damages of $4,250,000;

(5) intentional misrepresentation by C & A in connection with both the 1977 Contracts and the 1988 Agreement, causing damages of $4,250,000;

(6) intentional interference with BSI's employment contracts, causing damages of $4,250,000; and

(7) trade libel of BSI's installer network, causing unspecified damages in addition to the $4,250,000 sought elsewhere.

The district court entered judgment compelling arbitration of the first claim--for wrongful termination of contract--and staying arbitration of the remaining claims. We affirm that part of the district court's judgment that compels arbitration of the first claim, as well as that part of the judgment that stays arbitration of claims two through six. We vacate that part of the judgment that stays arbitration of claim seven, and remand for entry of judgment consistent with this opinion.

Discussion

We review de novo a judgment of the district court staying or compelling arbitration. See Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 846 (2d Cir.1987). In deciding this matter, we assume that BSI's allegations are true. See id. (in deciding arbitrability, court is to look to allegations of party demanding arbitration and--if they fall within the scope of the parties' agreement--court should compel arbitration, no matter how frivolous allegations appear to be).

Federal arbitration policy respects arbitration agreements as contracts that are enforceable in the same way as any other contract. To implement this understanding, and "to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate," the Congress adopted the Federal Arbitration Act, 9 U.S.C. Secs. 1 et seq. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-20, 105 S.Ct. 1238, 1241-42, 84 L.Ed.2d 158 (1985). That Act provides that a "written provision in ... a contract evidencing a transaction ... to settle by arbitration a controversy thereafter arising out of such contract or transaction ... 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. Sec. 2.

"[F]ederal policy strongly favors arbitration as an alternative dispute resolution process." David L. Threlkeld & Co. v. Metallgesellschaft Ltd., 923 F.2d 245, 248 (2d Cir.), cert. dismissed, 501 U.S. 1267, 112 S.Ct. 17, 115 L.Ed.2d 1094 (1991). We are instructed that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem. Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-42, 74 L.Ed.2d 765 (1983). Accordingly, "[f]ederal policy requires us to construe arbitration clauses as broadly as possible." Threlkeld, 923 F.2d at 250 (internal quotation and citation omitted). We will compel arbitration "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id. (internal quotation and citation omitted).

These are rules of construction, however, and what we construe is a contract. Accordingly, federal law "does not require parties to arbitrate when they have not agreed to do so...." Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989). Federal law "simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Id.

The crux of this dispute is BSI's allegation that C & A schemed to take without payment the profitable business that BSI had built pursuant to the 1977 Contracts. Allegedly, C & A implemented this scheme by feigning interest in acquiring BSI, so it could obtain proprietary information during due diligence--such as BSI's customer lists, marketing strategies, etc.--that C & A could use to replicate internally the functions previously performed by BSI. Because the 1988 Agreement was enforceable for two years, C & A simply waited until that Agreement expired before creating the infrastructure needed to perform internally the functions that BSI had performed for commissions under the 1977 Contracts. After that phase was completed, C & A had only to terminate the 1977 Contracts in order to displace BSI. C & A consolidated its hold on BSI's business by hiring BSI employees and spreading negative information regarding BSI's network of...