Iowa Grain Co. v. Brown
| Decision Date | 23 March 1999 |
| Docket Number | No. 98-1863,98-1863 |
| Citation | 171 F.3d 504 |
| Parties | Blue Sky L. Rep. P 74,180 IOWA GRAIN CO., Plaintiff-Appellant, v. Arthur F. BROWN, Jr., Laura W. Brown and William B. McGillivray, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Patrick G. King (argued), Henderson & Lyman, Chicago, IL, for Plaintiff-Appellant.
Linda C. Frazier (argued), Chicago, IL, for Defendants-Appellees.
Before EASTERBROOK, DIANE P. WOOD, and EVANS, Circuit Judges.
This case presents several twists on an increasingly common problem: When should a court enforce an arbitration agreement that arguably covers a dispute between two parties? Iowa Grain Company brought this action seeking a declaratory judgment that would relieve it of a contractual obligation to arbitrate certain claims arising out of its management of certain commodity accounts for defendants Arthur F. Brown, Jr., his wife Laura W. Brown, and William B. McGillivray ("the Customers"). It was Iowa Grain's position that the Customers had waived their right to arbitrate, otherwise apparently secure in the written agreements they had with Iowa Grain, because they had filed a class action lawsuit in the U.S. District Court for the District of South Carolina. That case, however, had been dismissed promptly by the court on Iowa Grain's motion to enforce the forum-selection provisions of the Customer Agreements they had signed. The district court in the present action concluded that the Customers had not waived their right to arbitrate by filing their class action and that the arbitration agreements remained enforceable. It dismissed the action and we affirm.
The underlying facts of the dispute hardly matter at this stage, and so we will confine our discussion to the briefest outline. The Customers became involved with Iowa Grain when Donald Eubanks, a registered commodity broker, solicited them and others to open individual discretionary commodity accounts with his company, Program Traders. Program Traders was an unincorporated introducing broker, guaranteed by Iowa Grain, which was and is a futures commission merchant. See 17 C.F.R. §§ 1.3, 1.10 et seq. Customer Arthur Brown signed an individual Iowa Grain Customer Agreement, Arbitration Agreement, and Trading Authorization form on March 10, 1995, that designated Eubanks as his agent for certain commodities transactions. Laura Brown did not sign that agreement or any other. William McGillivray opened the same kind of account as Arthur Brown did, and he entered into the same three agreements. In the end, unfortunately, Eubanks' trading strategy resulted in substantial losses for both the Browns and McGillivray, all of whom were unsophisticated investors.
On June 27, 1997, the Customers filed the South Carolina federal lawsuit, which they attempted to bring as an action "on behalf of a class of all persons who have or had an account with Don Eubanks, as guaranteed introducing broker, and Iowa Grain." Their complaint (which invoked only diversity jurisdiction and named only Iowa Grain as a defendant) alleged a number of common law violations as well as violations of federal and state securities laws and the federal Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. § 1961. Iowa Grain promptly moved to dismiss the case on the basis of the forum-selection clause in the basic Customer Agreement, which read:
(p 24) Forum Selection and Consent to Jurisdiction.
The undersigned ("Customer") agrees to bring any judicial action, including any complaint, counterclaim, cross-claim or third party complaint, arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any transaction covered hereby or otherwise arising in connection with the relationship between the parties including any action by Customer against Iowa Grain or any person who is an officer, agent, employee or associated person of Iowa Grain at the time the cause of action arises, only in courts located within Cook County, Illinois. The undersigned ("Customer") also consents and submits to the jurisdiction of any state or federal court located within Cook County, Illinois. Customer waives any right Iowa Grain may have to transfer or change the venue of any litigation brought against Customer by Iowa Grain.
If Customer has not signed an Arbitration Agreement with Iowa Grain, Customer agrees that any action or proceeding between Iowa Grain (and its agents, employees, officers and directors) and Customer arising out of this Agreement or any transaction covered hereby shall be litigated only in courts whose situs is within Chicago, Illinois.
The South Carolina district court rejected the Customers' efforts to show that the forum-selection agreement was unenforceable (for reasons like inequality of bargaining power, inconvenience, and the like) and, on September 12, 1997, it dismissed the action. Later, on October 17, 1997, the court issued a brief order on the Customers' motion for reconsideration and clarification in which it reaffirmed its decision to dismiss the case and added this statement:
Although the court finds its ruling to be clear, to avoid any potential confusion, it reiterates that the dismissal of this action was based upon the forum-selection clause in the Customer Agreements and not on the merits of the case. The dismissal was without prejudice, allowing Plaintiffs to proceed with their claims in one of the forums permitted by the Customer Agreement should they so choose.
At the same time as they pursued their motion for reconsideration and clarification, the Customers turned to the Arbitration Agreements Arthur Brown and McGillivray had signed. Those agreements contained the following two paragraphs:
Iowa Grain and the undersigned Customer agree that any controversies arising out of or relating to any of the Customer's accounts with Iowa Grain, relating to transactions with Iowa Grain and/or its employees, affiliates, and/or agents or arising out of the Customer Agreement executed by the Customer, including any counterclaims to any action brought against Customer by or on behalf of Iowa Grain, shall be settled by arbitration in accordance with the rules, then in effect, of any contract market where the transaction(s) giving rise to the controversy were or could have been executed, the American Arbitration Association or the National Futures Association. The laws of the State of Illinois shall govern any arbitration.
At such time as the Customer may notify Iowa Grain of its intention to submit a claim to arbitration, or at such time as Iowa Grain may notify the Customer of its intention to submit a claim to arbitration, the Customer will have the opportunity to elect a forum for conducting the proceedings.
On September 23, 1997 (the same day the motion for reconsideration and clarification was also filed), the Customers filed a demand for arbitration of their claims against Iowa Grain before the American Arbitration Association (AAA) in South Carolina. These demands were brought individually by the Browns, on the one hand, and McGillivray, on the other; the Customers made no effort to serve as class representatives.
Rather than cooperating with the arbitration, Iowa Grain responded by filing this lawsuit in the district court for the Northern District of Illinois on October 14, 1997. Invoking the Declaratory Judgment Act, 28 U.S.C. § 2201, it sought a ruling that the Customers had acted inconsistently with their contractual arbitration rights when they filed the South Carolina action, and thus that they had waived their right to arbitrate. The district court rejected this position, reasoning that since class actions cannot be arbitrated absent an explicit agreement, the Customers did not act inconsistently with their contractual obligation to arbitrate by filing a putative class action and thus there was no waiver. The court dismissed Iowa Grain's complaint with a minute order that directed the parties to pursue their dispute in arbitration proceedings under the agreement.
Before we address the merits of Iowa Grain's appeal, we must examine our own appellate jurisdiction. On one level, jurisdiction appears obvious: the district court entered an order that disposed of every matter before it and the dismissal was embodied in a Rule 58 final judgment, which is normally enough to invoke appellate jurisdiction under 28 U.S.C. § 1291. In addition, the Federal Arbitration Act confers appellate jurisdiction over "a final decision with respect to an arbitration that is subject to [the Act]." 9 U.S.C. § 16(a)(3).
The only thing that complicates this otherwise straightforward analysis is the additional judge-made requirement in arbitration cases that an appeal will lie from a judgment that is final for § 1291 purposes only if the proceeding before the district court was an "independent" one, not one in which the arbitration issue was "embedded" with other claims. See Napleton v. General Motors Corp., 138 F.3d 1209, 1212 (7th Cir.1999); Perera v. Siegel Trading Co., 951 F.2d 780, 784-85 (7th Cir.1992). An "independent" proceeding, as the Napleton decision explained, is one in which the request to compel arbitration is the sole issue before the district court. 138 F.3d at 1211. If the suit before the district court both asks for substantive relief on a claim and seeks action forcing the parties to arbitrate, Napleton holds that the arbitration ruling must be characterized as "embedded" in the overall action. Id. at 1212. This is so even if the district court dismisses the entire action and finally terminates all proceedings so that arbitration can proceed. Id. From a policy standpoint, that course of events strongly resembles an order requiring the parties to arbitrate, which would not be appealable as a separate matter if the district court merely stayed the remainder of the action...
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