Kawasaki Heavy Indus., Ltd. v. Bombardier Recreational Prods., Inc.

• Decision Date: 21 October 2011
• Docket Number: No. 11–2120.,11–2120.
• Citation: 660 F.3d 988
• Parties: KAWASAKI HEAVY INDUSTRIES, LTD., also known as Kawasaki Jukogyo Kabushiki Kaisha and Kawasaki Motors Manufacturing Corp., U.S.A., Plaintiffs–Appellees, v. BOMBARDIER RECREATIONAL PRODUCTS, INC., and BRP U.S., Inc., Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

660 F.3d 988

KAWASAKI HEAVY INDUSTRIES, LTD., also known as Kawasaki Jukogyo Kabushiki Kaisha and Kawasaki Motors Manufacturing Corp., U.S.A., Plaintiffs–Appellees,

v.BOMBARDIER RECREATIONAL PRODUCTS, INC., and BRP U.S., Inc., Defendants–Appellants.

No. 11–2120.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 15, 2011.Decided Oct. 21, 2011.

David B. Jinkins, Richard A. Mueller (argued), Attorneys, Thompson Coburn LLP, St. Louis, MO, for Plaintiffs–Appellees.

John S. Sandberg (argued), Attorney, Sandberg, Phoenix & Von Gontard, St. Louis, MO, for Defendants–Appellants.

Before FLAUM, MANION, and SYKES, Circuit Judges.

FLAUM, Circuit Judge.

The plaintiffs-appellees, Kawasaki Heavy Industries, Ltd. and Motors Manufacturing Corp., U.S.A. (together “Kawasaki”), filed several claims against appellants Bombardier Recreational Products, Inc. and BRP U.S., Inc. (together “BRP”). Kawasaki also filed claims against BRP's attorneys and Bank of Montreal, a secured lender of BRP. The claims all arise from a settlement agreement between Kawasaki and BRP, and that agreement contains an arbitration clause. Pursuant to the arbitration clause, BRP filed a motion to dismiss or stay all of Kawasaki's claims pending arbitration. Regarding the claims against BRP, the district court held that BRP waived its right to arbitrate. As for the claims against the other parties, the district court held that BRP's attorneys and Bank of Montreal can neither compel arbitration nor be compelled to arbitrate, as they are not signatories to the settlement agreement at issue. Thus, the district court denied BRP's motion to dismiss or stay as it applies to all claims. For the following reasons, we reverse the district court's finding of waiver on the part of BRP and vacate the court's ruling regarding the arbitrability of claims against Bank of Montreal and the attorneys.

I. Background

The dispute between BRP and Kawasaki originated with several cases filed between February 2006 and April 2007 alleging patent infringement, most notably Kawasaki Heavy Industries, Ltd. v. Bombardier Recreational Products, Inc. and BRP–US, Inc., Case No. 06–cv–222 (E.D.Tex.) (the “Texarkana Litigation”), which was filed by Kawasaki.¹ In September 2007, the parties agreed in principle to a settlement agreement (the “Settlement Agreement”). The Settlement Agreement required both parties to dismiss their respective lawsuits and includes covenants not to sue for patent infringement. It also includes two important provisions that are central to this case: an alternative dispute resolution provision and a request for a subordination agreement. The alternative dispute resolution provision, or arbitration clause, stated, in pertinent part:

Any claim, dispute or controversy between the parties arising out of or relating to this Settlement Agreement shall be resolved by first a personal meeting between representatives.... Should a resolution fail to be reached through a personal meeting ... the party asserting such dispute shall provide notice to the other party of its intention to submit the dispute to non-binding mediation.... Should a resolution fail to be reached through non-binding mediation ... each party agrees to submit the dispute to binding arbitration to be held in Dallas, Texas.The second provision at issue, the subordination clause, required BRP to secure an agreement with Bank of Montreal, a creditor who holds a security interest over BRP's patent portfolio.² The subordination clause states, “BRP shall cause all security agreements between BRP and the Bank of Montreal that affect any and all of the BRP Patents ... to be made subordinate to this Settlement Agreement.” The purpose of this required agreement is to prevent Bank of Montreal from taking BRP's patents free of the Settlement Agreement's covenant not to sue in the event that Bank of Montreal must foreclose upon BRP.

Before executing the Settlement Agreement, Kawasaki requested confirmation that the subordination agreement between BRP and Bank of Montreal was in place. In response to this request, BRP's attorneys, Robert Goethals and Harry Marcus, sent an email stating, “BRP has just received word that Bank of Montreal will agree to subordinate the security interests.” Satisfied with this assurance, Kawasaki agreed to execute the Settlement Agreement, which went into effect on March 31, 2008. In accordance with the Settlement Agreement, both parties dismissed their patent suits. Within eight days of the effective date of the Settlement Agreement, however, BRP informed Kawasaki that finalizing the subordination agreement was taking longer than it anticipated, and that BRP would need an additional 15 days to complete and execute the subordination with Bank of Montreal. When Kawasaki expressed concern regarding this delay, BRP assured Kawasaki that Bank of Montreal had already agreed to the subordination and that the delay was due solely to the need to work with Bank of Montreal's attorneys on preparing the agreement. Once again satisfied, Kawasaki completed its obligations under the Settlement Agreement shortly thereafter.

On May 14, 2008, BRP informed Kawasaki that it would not provide the subordination agreement detailed in the Settlement Agreement. The parties attempted to settle the dispute informally to no avail. In response to the stalled negotiations, BRP demanded arbitration, but on April 1, 2009, Kawasaki filed a petition in the Texarkana Court—the court where it originally filed its patent claim—seeking to vacate the voluntary dismissal of its former claim and compel BRP to comply with the Settlement Agreement. BRP opposed the motion, arguing two jurisdictional points: (1) the court lacked subject matter jurisdiction given that the dispute about the Settlement Agreement was not related to the underlying and original patent litigation, and (2) the parties agreed to arbitrate all claims arising from or relating to the Settlement Agreement. After briefing from both parties on these issues, the Texarkana Court ultimately agreed with BRP that the court lacked subject matter jurisdiction over a dispute about the Settlement Agreement.³ Kawasaki appealed the Texarkana Court's ruling to the Federal Circuit, and while the appeal was pending, both parties participated in court-mandated mediation. Before the Federal Circuit decided the case, Kawasaki voluntarily dismissed its appeal and filed the present action.

The theory underlying Kawasaki's claims is that either BRP and its attorneys lied about the existence of a subordination agreement with Bank of Montreal or Bank of Montreal reneged on its agreement to subordinate its security interest in the patents. Pursuant to that theory, Kawasaki has requested specific performance of BRP's obligations under the Settlement Agreement or, in the alternative, has asserted claims for breach of contract, fraud, fraud in the inducement, negligent misrepresentation, and negligence against BRP. It has filed the same claims, with the exception of the breach of contract claim, against Robert Goethals and Harry Marcus, the attorneys that represented BRP during the execution of the Settlement Agreement. Finally, Kawasaki has filed a breach of a third-party beneficiary contract claim and a tortious interference claim against Bank of Montreal. Citing the arbitration clause in the Settlement Agreement, BRP moved to dismiss all of Kawasaki's claims or, in the alternative, stay the claims pending arbitration pursuant to the Federal Arbitration Act. 9 U.S.C. § 1 et seq. Kawasaki opposed the motion by arguing the following: (1) BRP waived its right to arbitrate, and (2) Bank of Montreal, Goethals and Marcus (together “non-signatory parties” or “non-signatories”) do not have a right to participate in arbitration, as they were not parties to the Settlement Agreement. The district court agreed and denied BRP's motion to dismiss or stay pending arbitration. BRP appeals.

II. Discussion

A. BRP's Waiver of Right to Arbitrate

The arbitration clause at issue covers “[a]ny claim, dispute or controversy between the parties arising out of or relating to [the] Settlement Agreement.” Thus, there is no question that the arbitration clause in the Settlement Agreement is broad enough to cover each of Kawasaki's claims against BRP.⁴ The only question, then, is whether BRP waived its right to arbitrate the claims brought against it.

The district court held that BRP's actions throughout its dispute with Kawasaki were inconsistent with the intent to arbitrate, and thus BRP waived its arbitration right. The court found that BRP's intent to litigate rather than arbitrate was evident from its participation in the Texarkana litigation, the appeal that followed, and the mandatory mediation. The district court further reasoned that BRP exhibited undue delay in seeking arbitration, which is contrary to an intent to arbitrate. While the factual findings that led to the district court's conclusion of waiver are reviewed for clear error, “the question of whether [BRP's] conduct amounts to waiver is reviewed de novo.” Ernst & Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753, 756 (7th Cir.2002).

The Federal Arbitration Act (“FAA”) was originally enacted “to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). In furtherance of this goal, the FAA “provides for stays of proceedings in federal district courts when an issue in the proceeding is referable to arbitration, § 3, and for orders compelling arbitration when one party has failed, neglected, or refused to comply with an arbitration agreement, § 4.” Id. at 25, 111 S.Ct. 1647; 9 U.S.C. §§ 3–4. Despite the federal policy favoring arbitration, a contractual...