PMC, Inc. v. Atomergic Chemetals Corp., 93 Civ. 2881 (LBS).

• Decision Date: 23 February 1994
• Docket Number: No. 93 Civ. 2881 (LBS).,93 Civ. 2881 (LBS).
• Citation: 844 F. Supp. 177
• Parties: PMC, INC., Plaintiff, v. ATOMERGIC CHEMETALS CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

844 F. Supp. 177

PMC, INC., Plaintiff, v. ATOMERGIC CHEMETALS CORPORATION, Defendant.

No. 93 Civ. 2881 (LBS).

United States District Court, S.D. New York.

February 23, 1994.

Nixon, Hargrave, Devans & Doyle, New York City (Frank H. Penski, Robert C. Sentner and Matthew Tracy, of counsel), for plaintiff.

Wolfe & Yukelson, Port Washington, NY (Bruce Yukelson, of counsel), for defendant.

OPINION

SAND, District Judge.

This case concerns the arbitrability of a dispute arising out of an aborted 1989 chemicals sale. In December of 1989, plaintiff PMC, Inc. ("PMC") executed a "blanket purchase order" for approximately $15 million worth of chemicals from defendant Atomergic Chemetals Corporation ("Atomergic"). The following month, a PMC representative signed a "confirmation of sale" form which contained a clause obliging the parties to submit subsequent disputes to arbitration. Further negotiations over a marketing agreement stalled, and only a very small amount of the chemicals was ever purchased. Three years later, pursuant to the arbitration clause, Atomergic served PMC with a Demand for Arbitration before the American Arbitration Association, demanding payment of $6.6 million for the unsold chemicals. PMC responded by bringing this action, seeking a permanent stay of the arbitration and a declaratory judgment that no arbitration agreement exists between the parties. The case presents us with a significant issue: whether a party that signs papers which appear on their face to be binding and which contain an arbitration clause, may be entitled, under the Federal Arbitration Act, U.S.C. Title 9, to a judicial determination of the contractual nature of the documents before it is required to submit to arbitration of the dispute.

Atomergic has moved to dismiss the complaint, for summary judgment, and for a stay of this action pending arbitration. PMC cross-moved for a preliminary stay of arbitration. By Order dated July 26, 1993, we granted PMC's motion, staying arbitration pending further order of this Court. For the reasons set forth below, we now deny Atomergic's motion and determine that the matter will proceed to trial.

BACKGROUND

PMC is a Delaware corporation with its principal place of business in California. Atomergic is a New York corporation with its principal place of business in New York. Both corporations are primarily engaged in the chemical business.

The central events triggering this litigation are not contested, although the parties differ strongly as to how they should be interpreted. In 1989, Gordon McCullough ("McCullough") was general manager at a PMC plant in Cincinnati, Ohio, one of six facilities of the PMC Specialties Group, a division of PMC. In the spring of 1989, he read an article in a technical journal about an "aversive agent" known as Denatonium Saccharide ("DNS"), which was patented by Atomergic in 1985. An "aversive agent" is a substance added to poisonous products such as engine coolants to make them taste terrible and thus discourage children and animals from ingesting them. Atomergic notes that DNS is "the world's bitterest substance as certified by the Guinness Book of Records." Blum Aff. ¶ 4.

Although no market existed for DNS at the time, McCullough was nevertheless interested in the product for two reasons. McCullough Aff. ¶ 3. First, DNS contains saccharin, of which PMC is the only American manufacturer. Also, McCullough had learned that legislation was pending in Congress and in several states which would require the engine coolant industry to incorporate aversive agents into their products. If this legislation were to pass, a huge potential market for the product could be created.

A series of meetings ensued in the summer and fall of 1989 between McCullough and Melvin Blum ("Blum"), a vice president of Atomergic, to discuss the possibility that Atomergic could manufacture, and PMC could market, DNS. During these meetings, the parties attempted to estimate the potential market for DNS if the entire engine coolant industry were to incorporate DNS into their product. The parties agreed that Atomergic did not have the capacity to manufacture that large an amount of DNS — estimated at 60,000 pounds a year — and that it would need to line up "toll manufacturers" to meet this figure if the market ever developed. Id. ¶¶ 5-6.

Following these meetings, PMC and Atomergic attempted to negotiate a marketing agreement pursuant to which PMC would market, and Atomergic would manufacture and arrange for others to manufacture, DNS. Several drafts of a proposed agreement were exchanged in early 1990. See id. Exhs. A, B, C (January 4, March 2, and April 6 drafts).

It was during this period, in the course of negotiations over the marketing agreement, that the documents at issue in this litigation were executed. Atomergic claims that these documents — a "blanket purchase order" for 60,000 pounds of DNS (the "Purchase Order") and a "confirmation of sale" form (the "Confirmation of Sale"; collectively, the "Documents") — were binding contractual documents, which it now seeks to enforce; PMC claims that they were mere forms which the parties did not intend to have binding effect.

McCullough forwarded the Purchase Order to Blum in December of 1989. The Purchase Order, on a PMC preprinted form, was signed by Diana Grabo, PMC's purchasing agent. See id. Exh. D. It lists the quantity of purchase as "approx." 25,000 pounds "First Campaign," and 35,000 pounds "Second Campaign." Price is also listed as "approximate," and in the "DATE REQUIRED" box, "As released" has been filled in.

Blum responded by sending McCullough the Confirmation of Sale. This document, which is dated January 31, 1990 and signed by Blum, is a one-page order form preprinted by Atomergic, with boxes for order number, delivery date, F.O.B. location, terms, date, quantity, commodity, and price. See id. Exh. E. In the "QUANTITY" box is typed "60,000 lbs Annual contract," and in the "Delivery" box, "90 days after release." In the oversized box labelled "COMMODITY" is the arbitration clause under which Atomergic now demands arbitration.¹ Below the boxes describing the order of DNS, a box is checked next to the statement, "We accept order as described above." McCullough signed the Confirmation of Sale and returned it to Atomergic.

Following execution of these two documents, the parties continued to exchange letters and documents, and PMC applied for a trademark for DNS ("ReJeX-iT") and made a small (22-pound) purchase of DNS. See McCullough Aff. ¶¶ 7-12, 26; Blum Aff. ¶¶ 14-20. The expected legislation, however, stalled, the market for DNS never developed as anticipated, and the proposed marketing agreement was never executed. McCullough Aff. ¶¶ 13. Three years later, in February 1993, Atomergic served PMC with a Demand for Arbitration, claiming that PMC had breached its obligations under the Purchase Order and Confirmation of Sale. PMC responded with this action, jurisdiction of which is founded on diversity.

DISCUSSION

The underlying issue in this case is whether, through signing the Purchase Order and Confirmation of Sale, PMC entered into a legally binding contract with Atomergic and is thus bound by the arbitration clause in the Confirmation of Sale. This underlying question is not before us, however. Instead, we must consider the narrower question raised by Atomergic's motion: whether the question of the existence of a contract should be decided by this Court rather than an arbitrator; and, if so, whether PMC has raised issues of fact about the existence of the contract sufficient to defeat Atomergic's summary judgment motion. We conclude that the answer to both parts of this question is "yes." We then briefly consider two other arguments advanced by Atomergic, both of which we find meritless.

I. Who Should Determine Whether the Parties Entered into a Contract

Atomergic contends that an arbitrator, rather than this Court, should determine whether the Purchase Order and Confirmation of Sale constitute a binding contract which obliges PMC to submit to arbitration. For this contention, Atomergic relies principally on two Supreme Court decisions — Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), and Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) — and on cases in other circuits interpreting Prima Paint.

In Prima Paint, the Court, looking to § 4 of the Federal Arbitration Act, 9 U.S.C. § 4, concluded that a federal court must order arbitration "once it is satisfied that `the making of the agreement for arbitration ... is not in issue.'" 388 U.S. at 403, 87 S.Ct. at 1806 (quoting 9 U.S.C. § 4) (emphasis added). It held, specifically, that while a court should itself examine a party's allegations that an arbitration clause was fraudulently induced ("an issue which goes to the `making' of the agreement to arbitrate"), it should leave to the arbitrator any claims of fraudulent inducement of the contract as a whole, since "the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally." Id. at 402-04, 87 S.Ct. at 1805-06.²

In Moses H. Cone Hospital, the Court reaffirmed Prima Paint and the "federal policy favoring arbitration" that it represented. 460 U.S. at 24, 103 S.Ct. at 941. A party to a contract had attempted to stay arbitration on the grounds that its opponent, through delay, had waived its right to enforce the contract. Applying the reasoning of Prima Paint, the Court ordered arbitration of the dispute. It concluded that:

as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.

Id. at 24-25, 103 S.Ct. at 941.

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