Ferro Corp. v. Garrison Industries, Inc.

Decision Date10 June 1998
Docket Number96-3771,Nos. 96-3703,s. 96-3703
PartiesFERRO CORPORATION, Plaintiff-Appellee/Cross-Appellant, v. GARRISON INDUSTRIES, INC., Defendant-Appellant/Cross-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

Randall G. Vaughan (argued and briefed), Kevin P. Doyle and William D. Toney (briefed), Pray, Walker, Jackman, Williamson & Marlar, Tulsa, OK, Suellen Oswald (briefed), Duvin, Cahn & Hutton, Cleveland, OH, for Defendant-Appellant/Cross-Appellee..

Laura Kingsley Hong (argued and briefed), Thomas G. and Marcel C. Duhamel (briefed), Squire, Sanders & Dempsey, Cleveland, OH, for Plaintiff-Appellee/Cross-Appellant..

Before: KEITH and SUHRHEINRICH, Circuit Judges; ROSEN, District Judge. *


ROSEN, District Judge.


This cross-appeal concerns the arbitrability of a Custom Manufacturing Agreement entered into by the parties. When a dispute arose concerning the agreement, Defendant-Appellant Garrison Industries, Inc. filed a demand for arbitration, alleging breach of contract. Plaintiff-Appellee Ferro Corporation initially engaged in the arbitration, but later collaterally attacked Garrison in both state and federal court.

At the center of the dispute is the District Court's ruling that the issue of fraudulent inducement of the contract was justiciable under Ohio law, and not subject to arbitration in the first instance, and its ruling vacating the arbitration award.


On March 17, 1992 Plaintiff Ferro Corporation ("Ferro") and Defendant Garrison Industries, Inc. ("Garrison") executed a requirements contract, known to the parties as the Custom Manufacturing Agreement ("CMA"). In the CMA, Garrison agreed to manufacture for Ferro a Ferro-developed product known as PyroCheck LM, which was intended for use as a flame retardant additive to certain thermoplastics. 1 Garrison promised to manufacture at least 1.5 million pounds of PyroCheck LM per year, and as much as 3 million pounds per year. Ferro agreed to pay Garrison $250,000 up front to purchase and upgrade Garrison's manufacturing equipment, so that Garrison could manufacture PyroCheck LM, and to accept and pay for (at the rate of 90 cents per pound) the PyroCheck LM that Garrison produced. The CMA had an initial term of two years, contained a standard arbitration clause drafted by Ferro, and an Ohio choice-of-law provision.

Upon executing the contract on March 17, the parties agreed that Garrison would begin production of PyroCheck LM as soon as Garrison completed certain upgrades to its facilities as contemplated by the contract. However, Garrison did not begin to produce PyroCheck LM until May 28, 1992 because in addition to spending time making the upgrades agreed to by the parties, Garrison needed time and money to repair damage to its facilities caused by a tornado on May 9, 1992. 2

During the next several months, Garrison continued to produce PyroCheck LM as it experimented with various chemical production processes. Although the product Garrison manufactured did not always meet Ferro's specifications 3 and the quantity produced fell short of the contract minimums, Ferro purchased all of the product Garrison produced through March 26, 1993. 4 On March 26, 1993, however, Ferro ordered Garrison to cease production of PyroCheck LM and later told Garrison it did not intend to purchase any more of the PyroCheck LM that Garrison might produce, and sent a contract termination letter to Garrison in December of 1993.

Despite Ferro's expressed desire to discontinue its relationship with Garrison, Garrison sought payment from Ferro for the balance of the roughly 2.2 million pounds of PyroCheck LM that Ferro had promised it would buy from Garrison. Ferro refused, prompting Garrison to invoke the arbitration clause of the CMA on April 25, 1994. Ferro responded on May 15, 1994 with a counterclaim in arbitration. The arbitration was scheduled for January 9, 1995. Just before the arbitration was to begin, however, the parties engaged in a whirlwind of procedural moves and counter-moves.

On December 2, 1994, Ferro filed an action in state court seeking to enjoin the arbitration and have the court rescind the contract because Garrison had fraudulently induced Ferro to enter into the CMA. Ferro contemporaneously filed, with the arbitration panel, a motion to stay the arbitration proceedings pending the litigation. On December 20, 1994, the arbitration panel denied the motion to stay the arbitration proceedings. Ferro immediately sought to stay the arbitration proceedings anyway, by filing a motion for a temporary restraining order to stay the arbitration in its state court action. The state court set the matter for hearing on December 22, 1994.

On December 21, 1994, before the state court had ruled on Ferro's motion for a temporary restraining order, Garrison removed the action to the United States District Court for the Northern District of Ohio, where it was assigned to Judge Kathleen M. O'Malley. Ferro's counsel appeared in Judge O'Malley's chambers in federal court on December 21, 1994, seeking an emergency meeting with the Court and requesting immediate issuance of a temporary restraining order, so that Ferro's counsel could avoid preparing for the impending arbitration. Since Judge O'Malley was not in chambers, she communicated through her clerk to Ferro's counsel (after being reached by telephone) that the Court declined to rule on the motion immediately, but that the Court would hold a hearing on the motion before the arbitration was scheduled to commence. Ferro's counsel, either refusing or unable to understand this ruling, then went to Judge Aldrich, who was the "emergency/miscellaneous judge" on duty at that time, and asked her to issue a temporary restraining order on the grounds that Judge O'Malley was "unavailable" to consider Ferro's request. Judge Aldrich's clerk learned from Judge O'Malley's chambers what had already transpired, and quite properly refused to present the matter to Judge Aldrich. The next day, Judge O'Malley set a hearing on the motion for a temporary restraining order for January 5, 1995, and consolidated the hearing to include a hearing on Ferro's request for preliminary injunctive relief. Also on December 22, 1994, the state court--apparently unaware that the case had been removed to federal court--issued the requested temporary restraining order. Of course, the state court no longer had jurisdiction over the dispute, so the state court's order was null and void. Nonetheless, Ferro sent a copy of the void order to the arbitration panel. 5

On December 28, 1994, Garrison moved the District Court to refer all issues raised in the complaint (including Ferro's fraudulent inducement claim) to arbitration. Essentially, Garrison opposed Ferro's request for an injunction and sought an order declaring that the question of whether it had fraudulently induced Ferro to enter the CMA was an issue that only the arbitrators could resolve. Judge O'Malley ordered that the issues raised in Garrison's motion would also be heard at the January 5, 1995 hearing.

At the time of the January 5, 1995 hearing, Ferro had asserted only one basis for its claim of fraudulent inducement: that it was induced into entering the CMA by Garrison's false representation that Garrison was capable of manufacturing for Ferro the minimum quantities of PyroCheck LM using a specific, agreed-upon chemical manufacturing process. As noted, infra, later, Ferro added a second basis for its claim of fraudulent inducement: that it was induced into entering the CMA by Garrison's false representation that Garrison sustained only minor, cosmetic damage from the tornado. These two claims are referred to, respectively, as the 'production fraud claim' and the 'tornado fraud claim.'

After conducting the scheduled hearing, Judge O'Malley declined the parties' requests for declaratory or injunctive relief and set the case for trial. The Court held that the issue of whether Garrison fraudulently induced Ferro to enter the agreement was non-arbitrable under Ohio law, and thus retained jurisdiction over that claim. Nonetheless, the Court declined to stay the arbitration. Regarding Ferro's motion for an order restraining the arbitration from going forward, the Court found, among other things, that Ferro had failed to establish a likelihood of success on the merits of its production fraud claim. The Court also noted:

[The production] fraudulent inducement claim is belated in that both parties had previously invoked the arbitration clause, the arbitration has begun and was under way, [and] the arbitration panel has had an opportunity to have not only an initial hearing but to set a more detailed hearing on the question of liability ... [U]nder these circumstances, ... the public interest is more in favor of allowing the arbitration to proceed, especially an arbitration that the parties clearly agreed to with such broad terms, and an arbitration under an arbitration clause that the plaintiff does not dispute that it itself drafted.

Hearing Tr. at 8-9 (Jan. 5, 1995) (emphasis added).

The Court, therefore, denied the motion for a temporary restraining order, but enjoined the arbitration panel from "resolving the ultimate question of whether the contract at issue in this case has been fraudulently induced." Following the issuance of this Order, the arbitration panel reset the pending arbitration to begin on January 10, 1995. The Court set the trial of Ferro's production fraud claim for April 18, 1995.

Over Ferro's objection, the arbitration panel chose to bifurcate its proceedings, separating its hearings into liability and damages phases. The arbitration panel heard evidence going to liability on January 10-12 1995. At that hearing, Garrison, for the first time, raised the issue of tornado damage suffered by...

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