Kagan v. Master Home Products Ltd.

• Decision Date: 06 June 2006
• Docket Number: No. ED 86574.,ED 86574.
• Citation: 193 S.W.3d 401
• Parties: Andrew KAGAN, Respondent, v. MASTER HOME PRODUCTS LIMITED and Smart Living Products, Inc., Appellants.
• Court: Missouri Court of Appeals

193 S.W.3d 401

Andrew KAGAN, Respondent, v. MASTER HOME PRODUCTS LIMITED and Smart Living Products, Inc., Appellants.

No. ED 86574.

Missouri Court of Appeals, Eastern District, Division Four.

June 6, 2006.

COPYRIGHT MATERIAL OMITTED

Jerome F. Raskas, Peter H. Love, St. Louis, MO, for Appellant.

Stanley J. Wallach, St. Louis, MO, for Respondent.

ROBERT G. DOWD, JR., Judge.

Master Home Products, Ltd. ("MHP") and Smart Living Products, Inc. ("SLP")(collectively referred to as "Defendants") appeal from the judgment denying their motion to dismiss Andrew Kagan's ("Plaintiff's") petition or stay the lawsuit pending arbitration. On appeal, Defendants argue the trial court erred by denying their motion because (1) the arbitration agreement is valid and enforceable in that the subject matter of the agreement falls within the scope of arbitration, and (2) the arbitration notification agreement of the Missouri Uniform Arbitration Act ("Missouri Act") does not apply to the agreement. We reverse and remand.

Plaintiff brought the instant action against Defendants.¹ In his petition, Plaintiff sought an accounting of royalties and a judgment for royalties he allegedly is entitled to receive under a contract with MHP concerning an invention. Plaintiff alleged he invented a device called "Mr. Misty." Mr. Misty is a humidification device that attaches to a conventional showerhead and disperses humidity using the shower's water supply. Plaintiff, a Missouri resident, alleged that in June 1997, he and MHP, an Illinois corporation, entered into a written royalty agreement. Under the royalty agreement MHP had an exclusive license to make, market, and sell any product within the scope of any patent maturing from the patent application that MHP was to submit. In consideration of the license, MHP agreed to pay Plaintiff royalties on products sold and to send Plaintiff quarterly written statements of the sales and amounts of royalty owed and payment of all royalties due. Paragraph 5 of the royalty agreement provides:

For a period of two years from payment of the Royalty, we will keep regular records and books of account containing particulars adequate to determine the amount of Royalties. At reasonable times, such records and books shall be open to you for reasonable confidential inspection at our place of business. This inspection shall be solely to determine the amount of Royalties. Any adjustments to the Royalties shall be made at the next quarterly report. Any disagreements as to Royalties shall be determined by final offer arbitration governed by the rules of the American Arbitration Association.

[Emphasis added]. The royalty agreement also provides that it is governed by Illinois law.

In his petition, Plaintiff alleged that Mr. Misty sales began in March of 2001. Plaintiff alleged he received a number of royalty reports and royalty payments in 2001, 2002, 2003, and 2004, but claims he did not receive all of the reports to which he is entitled. Plaintiff alleged he hired accountants to inspect MHP's records as provided in paragraph 5 of the royalty agreement. Plaintiff's accountants performed an inventory of the Mr. Misty units in Chicago, Illinois and an audit of the records of Defendants. Plaintiff's accountants determined a deficit of $188.²

In his petition, Plaintiff requested an accounting of all sums received by Defendants and of all Mr. Misty units distributed and sold. Plaintiff also requested that the trial court appoint a third party to account for shipments and returns of the product, and to determine the amount of damages and payments due under the royalty agreement. Plaintiff requested the trial court to order MHP to bear the expenses of the third-party accounting.

Defendants moved to dismiss Plaintiff's petition in favor of arbitration pursuant to paragraph 5 of the royalty agreement which requires arbitration of "any disagreements as to Royalties." The motion stated that the arbitration provision is enforceable under applicable state law and the Federal Arbitration Act ("FAA") and that the issues of the lawsuit were properly within the arbitration clause. The motion sought dismissal or, alternatively, a stay of the suit pending arbitration pursuant to the agreement.

Plaintiff filed a memorandum in opposition to Defendants' motion to dismiss. Plaintiff argued the agreement was unenforceable because it omitted the arbitration notification language required by Missouri law and further argued that his action seeking an accounting as to royalties did not constitute a "disagreement as to Royalties" and, therefore, was not arbitrable under the royalty agreement. Defendants filed a joint memorandum in support of their motion refuting Plaintiff's contentions. The trial court entered judgment denying the motion to dismiss. Defendants now appeal.³

In their first point,⁴ Defendants argue the trial court erred by denying their motions to dismiss or to stay the lawsuit pending arbitration because the arbitration agreement is valid and enforceable in that the subject matter of the agreement falls within the scope of arbitration. Specifically, Defendants contend that Plaintiff's petition, which seeks an accounting of royalties and damages for unpaid royalties, is a "disagreement as to Royalties" within the meaning of the arbitration agreement. We agree.

We review the trial court's denial of a motion to compel arbitration or to stay the case pending arbitration de novo. Triarch Industries, Inc. v. Crabtree, 158 S.W.3d 772, 774 (Mo. banc 2005). Whether a dispute is covered by an arbitration provision in a contract is a question of law. Dunn Indus. Group, Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. banc 2003). In ruling on a motion to dismiss or stay a lawsuit pending arbitration, a court must determine (1) whether a valid agreement to arbitrate exists between the parties, and (2) whether the specific dispute falls within the substantive scope of that agreement. Id. at 427-28. Furthermore, a "party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration." Madol v. Dan Nelson Automotive Group, 372 F.3d 997, 999 (8th Cir.2004)(quoting Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 91, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000)).

Here, the agreement evidences a transaction involving commerce. The royalty agreement was drawn up in Illinois, between an Illinois corporation and a Missouri resident, and mailed between states. The agreement involved marketing and sales of the Mr. Misty product throughout the United States. The FAA applies to this agreement because it affects commerce. The FAA favors arbitrability in the face of any doubts concerning the scope of arbitrable issues. Tractor-Trailer Supply Co. v. NCR Corp., 873 S.W.2d 627, 629 (Mo.App. E.D.1994).

The language in the royalty agreement can be interpreted to cover a lawsuit seeking an accounting of royalties and a judgment for unpaid royalties. Paragraph 5 specifies the manner by which royalties shall be reported, paid, and issues resolved. Paragraph 5 provides that MHP shall submit quarterly reports showing the amount of royalties with the payments and that the records of MHP shall be open "for reasonable confidential inspection" which shall be "solely to determine the amount of the Royalties." After specifying the manner of the reporting and verification of the amount of royalties, paragraph 5 then states that "any disagreement as to Royalties shall be determined by final offer arbitration governed by the rules of the American Arbitration Association." Therefore, the subject matter of the lawsuit clearly falls within the scope of the royalty agreement's arbitration provision.

Plaintiff further argues that the lawsuit did not concern a "disagreement as to royalties" because he was seeking an accounting. Plaintiff claims that there is not a disagreement as to royalties "unless or until Plaintiff knows if any disagreement as to royalties exists." We find this argument unpersuasive. A disagreement as to royalties is a prerequisite to establishing any right to accounting because an accounting, by definition, requires a disagreement over the amount owed. White v. Mid-Continent Investments, Inc., 789 S.W.2d 34, 40 (Mo.App. W.D.1990). By seeking an accounting, Plaintiff acknowledges a disagreement over the amount owed.

We find Mueller instructive on when courts require parties to arbitrate even where an agreement fails to specifically refer to the issue in dispute. In Mueller, an employee sued an employer concerning an employment contract. Id. at 185. The employment agreement submitted to arbitration "[a]ny claim or controversy ... arising out of or relating to this Agreement or the breach thereof, or in any way related to the terms and conditions" of employee's employment. Id. The employee sued for a declaratory judgment, mandamus, breach of contract, conversion, breach of fiduciary duty, accounting, and corporate dissolution. Id. Finding that the accounting count of the petition arose out of the contract and was covered by the arbitration provision, the court compelled it to arbitration. Id. at 188. Similar reasoning applies to the case at bar. Here, the arbitration agreement subjects all "disagreements as to Royalties" to final arbitration. Therefore, as in Mueller, any action in accounting is not separate and apart from an action concerning royalties that would be subject to arbitration.

In addition, Plaintiff claims it is important that the agreement calls for "final offer" arbitration,⁵ as opposed to "conventional" arbitration. Plaintiff contends he cannot participate in "final offer" arbitration without first having an accounting. We are unpersuaded by Plaintiff's argument.

"Final offer arbitration" restricts the arbitrator to choosing the final offer made by one of the parties. Note & Comment, Final Offer Arbitration: A Model for Dispute Resolution in Domestic and International Disputes, 10...