Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Intern., Ltd.

• Decision Date: 06 August 1993
• Docket Number: No. 92-3506,DIAL-A-MATTRESS,A-M,92-3506
• Citation: 1 F.3d 639
• Parties: SWEET DREAMS UNLIMITED, INC., an Illinois Corporation, Plaintiff-Appellee, v.INTERNATIONAL, LTD., a Delaware Corporation, Dial-attress Operating Corporation, a New York Corporation, Napoleon Barragan, Luis Barragan and Joseph Vicens, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 639

1 F.3d 639

SWEET DREAMS UNLIMITED, INC., an Illinois Corporation Plaintiff-Appellee, v. DIAL-A-MATTRESS INTERNATIONAL, LTD., a Delaware Corporation Dial-A-Mattress Operating Corporation, a New York Corporation, Napoleon Barragan, Luis Barragan and Joseph Vicens Defendants-Appellants.

No. 92-3506.

United States Court of Appeals Seventh Circuit.

Argued Feb. 22, 1993.

Decided Aug. 6, 1993.

Gerald A. Goldman, Arthur R. Ehrlich (argued), Ira Marcus, Goldman & Marcus, Chicago, IL, for plaintiff-appellee.

Jonathan G. Bunge, Angela Marsh, Mary B. Snyder, Keck, Mahin & Cate, Chicago, IL, Jeffrey J. Keyes (argued), James J. Long, Briggs & Morgan, Saint Paul, MN, for defendants-appellants.

Before CUMMINGS, CUDAHY and ROVNER, Circuit Judges.

CUDAHY, Circuit Judge.

Dial-A-Mattress International, Ltd. and Sweet Dreams Unlimited, Inc. were joint venturers engaged in the business of telemarketing bedding products and accessories. The parties memorialized their relationship in an agreement signed March 8, 1991 (the Agreement). The Agreement provided that Sweet Dreams, in exchange for the right to use certain of Dial-A-Mattress' trademarks, trade names and telephone numbers in the Chicago metropolitan area, would devise and implement a marketing campaign and operate a product delivery system for the parties' mutual benefit. They were to divide the revenues generated by the venture, ninety percent to Sweet Dreams and ten percent to Dial-A-Mattress. The Agreement expired in four months, according to its own terms, but Sweet Dreams was given an option to purchase a Dial-A-Mattress franchise.

Sweet Dreams continued to market products under the Dial-A-Mattress trademark even after the Agreement expired. Dial-A-Mattress apparently did not object to this, and, to induce Sweet Dreams to continue its marketing efforts, offered to expand Sweet Dreams' territory to include, first, the City of Los Angeles and, later, the entire continental United States (except for the State of New York). Sweet Dreams promptly accepted in both instances. Following substantial urging by Sweet Dreams, Dial-A-Mattress prepared a franchise agreement. This agreement was never executed and Dial-A-Mattress has, according to Sweet Dreams, "unreasonably and vexatiously refused to perform" according to it. Complaint, count II, p 23. Dial-A-Mattress severed entirely the parties business relationship in 1992. Moreover, Sweet Dreams charges, Dial-A-Mattress interfered with Sweet Dreams' arrangements with its suppliers in an attempt to force Sweet Dreams out of business and to usurp the successful marketing and distribution network that it had established.

Sweet Dreams filed a four-count complaint against Dial-A-Mattress in Illinois state court. Count I alleges that the Agreement violated Illinois law and that Sweet Dreams is, as a result, entitled to rescind it. In Count II, Sweet Dreams asserts that Dial-A-Mattress fraudulently induced it to continue making expenditures in developing the Chicago market after the Agreement had expired. Count III alleges the same with regard to the Los Angeles and national markets. Finally, Count IV alleges that Dial-A-Mattress intentionally interfered with certain of Sweet Dreams' business relationships. Dial-A-Mattress removed the case to the district court, jurisdiction being properly predicated upon a diversity of citizenship, and promptly moved the court to dismiss or stay the litigation pending arbitration of the parties' disputes.

Dial-A-Mattress argued that the Agreement relegated all of Sweet Dreams' charges to arbitration and that, as a result, the litigation must be stayed pending completion of the arbitration proceedings. ¹ The district court, in a careful opinion, concluded that the arbitration provision at issue did not encompass the parties' disputes and, consistent with this conclusion, denied Dial-A-Mattress' motion. Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress International, Ltd., 803 F.Supp. 1358 (N.D.Ill.1992). Dial-A-Mattress appeals from this decision. ² In resolving this puzzling matter, the district court placed great emphasis on certain decisions of other circuits, which denied arbitration based on assertedly relevant differences in wording of the respective arbitration clauses. Although these cases are instructive, we believe that they are subtly, but nonetheless materially, distinguishable from the present one. We also note that one of these opinions has been so limited by the court that issued it that it appears no longer to support the proposition for which the district court cited it. As a result, we are left to rely upon the clear thrust of our own arbitration cases and, of course, upon binding instruction from the Supreme Court. Because we find that these authorities compel arbitration of the parties' disputes, we reverse.

It is beyond peradventure that the Federal Arbitration Act embodies a strong federal policy in favor of arbitration. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). But the duty to arbitrate remains one assumed by contract, and we will not compel parties to arbitrate disputes unless they have agreed to do so. National R.R. Passenger Corp. v. Chesapeake & Ohio Ry. Co., 551 F.2d 136, 140 (7th Cir.1977). Our analysis thus begins with the language of the Agreement's arbitration provision itself: "Any disputes arising out of the agreement shall be settled and determined by the American Arbitration Association of the City of New York and their finding shall be binding and conclusive upon the parties hereto and judgment may be entered thereon in any court of record." Agreement p 4.

In deciding whether any or all of the counts of Sweet Dreams' complaint are subject to arbitration, we must bear in mind that, "[a]n order to arbitrate [a] particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id. (quoting United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 1352-53, 4 L.Ed.2d 1409 (1960)). Turning to Count I of the complaint, we observe that Sweet Dreams has requested rescission of the Agreement pursuant to the Illinois Franchise Disclosure Act, 815 ILCS 705/1-705/42 (1993). ³ This act prohibits offering for sale any franchise that has not been properly registered, 815 ILCS 705/5(1) (1993), and authorizes a franchisee that has purchased an unregistered franchise (which Sweet Dreams claims to be) to sue for rescission. 815 ILCS 705/26 (1993). A successful rescission action annuls the contract and returns the parties to the status quo ante. Howard O. Hunter, Modern Law of Contracts p 3.02 (1986). We are thus confronted with an interesting, if not somewhat metaphysical, question: Does a dispute, which has as its object the nullification of a contract, "arise out of" that same contract?

The Supreme Court has, we believe, answered this question in the affirmative, at least insofar as arbitration is concerned. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967), the Court held, over a vigorous three-Justice dissent, that a federal court may adjudicate issues going to the " 'making' of the agreement to arbitrate" (in that case allegations of fraudulent inducement) but that the Federal Arbitration Act "does not permit [a] federal court to consider claims of fraud in the inducement of the contract generally." ⁴ The Prima Paint rule applies though only if the dispute falls within the scope of the particular arbitration clause in question. The Supreme Court had no trouble with this threshold issue, stating that the parties "contractual language is easily broad enough to encompass Prima Paint's claim that both execution and acceleration of the ... agreement were procured by fraud." Id. at 406, 87 S.Ct. at 1807. Seizing upon a difference in language in the Agreement's arbitration provision and that involved in Prima Paint, the district court distinguished what it admitted would otherwise be binding authority compelling arbitration. We find the district court's reasoning to be challenging, but do not believe that in the end it can stand.

The arbitration clause in Prima Paint provided that "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration...." 388 U.S. at 398, 87 S.Ct. at 1803 (emphasis supplied). The district court reasoned that, because the phrase "relating to" appears in Prima Paint but not in the Agreement, the arbitration provision in the Agreement is narrower than that at issue in Prima Paint. The Agreement's clause is so much narrower, the district court found, that "it would be anomalous to hold that a challenge to the very existence" of the Agreement is arbitrable pursuant to it. 803 F.Supp. at 1361. In reaching this conclusion, the district court relied principally upon Mediterranean Ent., Inc. v. Ssagyong, 708 F.2d 1458, 1464 (9th Cir.1983), which in turn relied upon In re Kinoshita & Co., 287 F.2d 951 (2d Cir.1961), both of which denied arbitration. The district court commented that the arbitration provisions in these cases were "essentially on all fours" with that in the Agreement. 803 F.Supp. at 1360. But we find the clauses to be different in one key respect.

The arbitration provision in Mediterranean Ent. stated: "Any disputes arising hereunder ... shall be settled through binding arbitration...." 708 F.2d at 1461 (emphasis supplied). The analogous clause in Kinoshita required arbitration of "any dispute or difference [that] should arise under [the agreement]." 287 F.2d at 952. ⁵ Both courts accepted the argument that such clauses encompass only those disputes that relate to the interpretation and performance of the contract itself. 708 F.2d at 1464; 287 F.2d at 953. Here, of...