Wolsey, Ltd. v. Foodmaker, Inc.

• Decision Date: 19 May 1998
• Docket Number: No. 96-56345,96-56345
• Parties: 98 Cal. Daily Op. Serv. 3793, 98 Daily Journal D.A.R. 5235 WOLSEY, LTD., a Hong Kong corporation, Plaintiff-Appellee, v. FOODMAKER, INC., a Delaware corporation; Foodmaker International Franchising, Inc., a Delaware corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1205

144 F.3d 1205

98 Cal. Daily Op. Serv. 3793, 98 Daily Journal

D.A.R. 5235

WOLSEY, LTD., a Hong Kong corporation, Plaintiff-Appellee, v. FOODMAKER, INC., a Delaware corporation; Foodmaker

International Franchising, Inc., a Delaware

corporation, Defendants-Appellants.

No. 96-56345.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 5, 1997.

Decided May 19, 1998.

J. Anthony Sinclitico, III, Alan B. Lawhead, Jeffrey L. Mengoli, Gibson, Dunn & Crutcher, L.L.P., San Diego, California, for defendants-appellants.

Dennis O'Dorisio, Lynn E. Wedell, R. Craig Zafis, Urquhart, O'Dorisio & Wedell, San Diego, California, for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of California; William B. Enright, District Judge, Presiding. D.C. No. CV-96-634-E JFS.

Before: BEEZER, THOMPSON, and O'SCANNLAIN, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

In this suit to compel arbitration, we must examine the interplay between federal and state law in the application of a contract's arbitration clause.

I

In February of 1991, Foodmaker International ("Foodmaker"), a franchiser of Jack in the Box fast food restaurants, entered into a Development Agreement with Wolsey, Ltd. ("Wolsey"), a Hong Kong corporation, which gave Wolsey the right to develop Jack in the Box restaurants in Hong Kong and Macau for five years. The Development Agreement established a three-step dispute resolution process to be used for all disputes between Foodmaker and Wolsey: (1) a senior executive officer meeting; (2) non-binding arbitration under the rules of the American Arbitration Association; and (3) litigation in federal court.

In March of 1994, Wolsey invoked the dispute resolution procedure in the Development Agreement. Wolsey alleged that it had been fraudulently induced to enter into the Development Agreement by the express and implied misrepresentations of various Foodmaker executives that, if Wolsey successfully opened Jack in the Box restaurants in Hong Kong, Foodmaker would give Wolsey similar development rights to expand into China and extend Wolsey's development term in Hong Kong. Wolsey maintains that Foodmaker's president, Robert J. Nugent, conspired with Ta-Tung "Tony" Wang and QSR Management Company Limited ("QSR"), Wang's family owned company, to prevent Wolsey from developing restaurants in Asia so that QSR could develop the area itself.

After an unsuccessful meeting of the companies' senior executives in May 1994, Wolsey submitted the dispute to the American Arbitration Association. Wolsey asserted the following claims in the arbitration: (1) breach of contract; (2) breach of contract by hindrance of performance; (3) constructive fraud; (4) fraud in the inducement; (5) breach of the covenant of good faith and fair dealing; (6) interference with prospective economic advantage; (7) interference with contract; (8) breach of fiduciary duty; (9) unfair trade practices; and (10) unfair competition. After limited discovery and two weeks of arbitration, a Final Award of Arbitrators was issued in December of 1995. The panel determined Wolsey to be the prevailing party and rendered an award providing for various forms of relief, including an extension of Wolsey's development term for seven years and $200,000 for attorneys' fees.

Foodmaker declined to comply with the arbitration award. In April of 1996, Wolsey filed a complaint in federal court. In the complaint, Wolsey asserted claims for violations of the Lanham Act, the California Franchise Investment Law, and the Rackateer Influenced and Corrupt Organizations Act ("RICO"), none of which was asserted in the arbitration. ¹

Arguing that Wolsey's complaint asserted claims not advanced in the arbitration, Foodmaker moved to compel arbitration of those claims against the arbitration defendants. ² The district court denied the motion, and Foodmaker filed a timely appeal. We have jurisdiction over an appeal from an order denying a motion to compel arbitration under 9 U.S.C. § 16(a)(1)(C).

II

Section 19.3 of the Development Agreement between Wolsey and Foodmaker provides that "[e]xcept as provided in Section 19.2 hereof [pertaining to injunctions against Wolsey], all controversies, disputes or claims ... shall be submitted for non-binding arbitration." Foodmaker seeks to compel such arbitration pursuant to section 4 of the Federal Arbitration Act ("FAA"), which allows a party to an arbitration agreement to "petition any United States district court ... for an order directing that ... arbitration proceed in the manner provided for in [an arbitration] agreement." 9 U.S.C. § 4.

As a threshold matter, Wolsey maintains that the FAA does not apply to non-binding arbitration such as that provided for in the Development Agreement. ³ The FAA does not specifically define the term "arbitration." In arguing that the FAA does not apply to non-binding arbitration, Wolsey relies on Section 2 of the Act, which provides:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C. § 2 (emphasis added). Wolsey maintains that a provision in a contract to submit a controversy to non-binding arbitration is not a provision to "settle" a controversy. However, Wolsey's reliance on the use of the word "settle" in Section 2 of the FAA does not get it far. Black's Law Dictionary defines "settle" as:

A word of equivocal meaning; meaning different things in different connections, and the particular sense in which it is used may be explained by the context or surrounding circumstances. Accordingly, the term may be employed as meaning to agree, to approve, to arrange, to ascertain, to liquidate, to come to or reach an agreement, to determine, to establish, to fix, to free from uncertainty, to place, or to regulate.

Black's Law Dictionary 1230 (5th ed.1979).

Although the Ninth Circuit has never addressed whether the FAA applies to non-binding arbitration, other courts have. In AMF Inc. v. Brunswick Corp., 621 F.Supp. 456 (E.D.N.Y.1985), Judge Weinstein examined whether a contract containing a non-binding agreement to arbitrate was covered by the Act. Judge Weinstein observed:

Case law following the passage of the [Federal Arbitration] Act reflects unequivocal support of agreements to have third parties decide disputes--the essence of arbitration. No magic words such as "arbitrate" or "binding arbitration" or "final dispute resolution" are needed to obtain the benefits of the Act. See City of Omaha v. Omaha Water Co., 218 U.S. 180, 194, 30 S.Ct. 615, 616, 54 L.Ed. 991 (1910) (dictum) ("a plain case of the submission of a dispute or difference which had to be adjusted ... was in fact an arbitration, though the arbitrators were called appraisers").

. . . . .

Arbitration is a creature of contract, a device of the parties rather than the judicial process. If the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration.

Id. at 460 (emphasis added).

More recently, the Third Circuit adopted a slightly narrower definition of "arbitration" for purposes of the FAA in Harrison v. Nissan Motor Corp., 111 F.3d 343 (3rd Cir.1997). In Harrison, the court examined whether the informal dispute resolution procedure provided by a manufacturer pursuant to the Pennsylvania Automobile Lemon Law, 73 P.S. § 1951 et seq. (Purdon 1993), and the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et seq., qualified as "arbitration" under the FAA. The court characterized arbitration as follows:

Although it defies easy definition, the essence of arbitration, we think, is that, when the parties agree to submit their disputes to it, they have agreed to arbitrate these disputes through to completion, i.e. to an award made by a third-party arbitrator. Arbitration does not occur until the process is completed and the arbitrator makes a decision. Hence, if one party seeks an order compelling arbitration and it is granted, the parties must then arbitrate their dispute to an arbitrators' decision, and cannot seek recourse to the courts before that time.

Id. at 350 (emphasis added). The Third Circuit concluded that the alternative dispute resolution process contemplated by the Pennsylvania Lemon Law was inconsistent with this view of arbitration. The court reasoned that, because the Pennsylvania Lemon Law permits a dissatisfied car owner to "seek recourse to the courts" if he has not received a decision from the "arbitrator" within forty days, the dispute resolution process established by the statute would not be "pursue[d] ... to completion in all cases," and therefore would not "constitute arbitration within the meaning of the FAA." Id. at 351.

According to Judge Weinstein's analysis, parties agree to submit to arbitration under the FAA when they "agree[ ] to submit a dispute for a decision by a third party." See AMF Inc., 621 F.Supp. at 460. In addition, according to the Third Circuit's analysis, the parties must not only agree to submit the dispute to a third party, but also agree not to pursue litigation "until the process is completed." See Harrison, 111 F.3d at 350. Neither the Third Circuit nor Judge Weinstein held that the arbitrators's decision must be binding for the FAA to apply. Judge Weinstein stated that "[t]he arbitrator's decision need not be binding in the same sense that a judicial decision needs to be to satisfy the constitutional requirement of a justiciable case or controversy," AMF Inc., 621 F.Supp. at 460, and the Third Circuit explicitly declined to address "the question whether the FAA applies to nonbinding arbitration in general." Harrison, 111 F.3d at 350.

We are persuaded that, under the reasoning adopted by these courts, the...