UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
________________________________
)
)
NANOSOLUTIONS, LLC, et al. )
)
Plaintiffs, )
) Civ. Action No. 10-1741 (EGS)
v. )
)
RUDY PRAJZA, et al., )
)
Defendants. )
)
________________________________)
MEMORANDUM OPINION
This action arises out of an alleged breach of an Agreement
in Principle entered into by Nanosolutions, LLC (“Nano”) and
Aquiss Beverage Technologies, Inc. (“ABT”) (collectively,
“plaintiffs”), and Rudy Prajza (“Prajza”), Aqiss Canada, Ltd.
(“ACL”) and 2221267 Ontario, Ltd. (“Ontario”) (collectively
“defendants”). Pending before the Court are plaintiffs’ motion
for leave to amend their complaint and defendants’ motion and
renewed motion to stay the litigation pending arbitration. Upon
consideration of the motions, responses and replies thereto, the
applicable law, the entire record, and for reasons set forth
below, the Court will GRANT plaintiffs’ motion for leave to amend
the complaint, DENY AS MOOT defendants’ motion to stay, and GRANT
defendants’ renewed motion to stay the litigation in its entirety
pending arbitration.
I. BACKGROUND
Plaintiff Nano is a biotechnology company which develops
“technology involving tissue-like nano-encapsulation delivery
systems, providing instant delivery of payloads into the
bloodstream.” Pls.’ Am. Compl. (“Am. Compl.”) ¶ 19.1 Plaintiff
ABT, an affiliate of Nano, developed “the AQISS brand of vitality
beverages” which provides “bio-availability of electrolytes and
cell repair technology through nano-encapsulation.” Am. Compl.
¶ 21. Defendant Rudy Prajza is a citizen of Canada. Defendants
ACL and Ontario are two companies created by Prajza.
This case involves three contracts: a 2007 Employment
Agreement between Prajza and ABT (“Employment Agreement”), a
March 2010 Agreement between ABT and professional tennis player
Andy Roddick, who is not a party to this case (the “Roddick
Agreement”), and the June 2010 Agreement in Principle (“AIP”)
between all the parties in this case. The agreements will be
discussed in turn.
In 2007, ABT and Prajza entered into an employment agreement
(“Employment Agreement”), which provided for Prajza to become
Chief Marketing Officer of ABT. Under the agreement, ABT would
pay Prajza $150,000 per year plus benefits, expenses, and shares
of stock, in exchange for which Prajza was to “promote the
1
Unless otherwise stated, all facts are drawn from the
Amended Complaint.
2
beverage brand [AQISS] and expand the existing product sales and
distribution.” Am. Compl. ¶ 32. According to plaintiffs, Prajza
failed to perform the required functions of his position,
resulting in significant losses to ABT. In mid-2008 ABT ceased
making payments to Prajza under the Employment Agreement. The
Employment Agreement contains no arbitration provision. Am.
Compl. Ex. D.
After Prajza and ABT parted ways in 2008, ABT negotiated an
endorsement agreement with professional tennis player Andy
Roddick. ABT and Roddick executed the Roddick Agreement in March
2010, which grants to ABT the worldwide right to use Roddick’s
endorsement to promote ABT beverages, including AQISS. In
consideration for the right to use the athlete endorsement, the
Roddick Agreement provides, among other things, for minimum
annual royalties and the payment of a royalty on the sales of ABT
beverages. Am. Compl. ¶ 92. The Roddick Agreement does not
contain a mandatory arbitration provision. Pls.’ Opp’n to Motion
to Stay, Declaration of James Hovis (“Hovis Decl.”) ¶ 20.
Meanwhile, notwithstanding their troubled history, Prajza
and ABT remained in contact. Following protracted negotiations,
the parties executed an Agreement in Principle (“AIP”) for Prajza
and two companies created by him - Defendants Ontario and ACL -
to market and distribute AQISS products in Canada. In the AIP,
plaintiffs agreed to license Nano’s technology to defendants and
3
convey other rights in connection with the development,
production and marketing of AQISS in Canada. See Am. Compl. Ex.
A., AIP. In exchange for these rights, ACL and Ontario agreed to
pay royalties and other fees to plaintiffs and also agreed to
provide other services, including a website. Pursuant to the
AIP, ABT also agreed to sublicense to ACL its rights obtained
under the Roddick Agreement, so as to permit ACL to use the
endorsement of Andy Roddick in the marketing of AQISS. None of
the defendants are party to the Roddick Agreement. However, as a
condition of receiving the sublicense from ABT, defendant ACL
agreed “to be bound by all of the terms and conditions of the
Roddick Agreement and to take all necessary and reasonable
actions to ensure ABT’s compliance therewith pertaining to the
marketing and selling” of AQISS in Canada. AIP ¶ 2(a).
The AIP does not create an employment relationship between
Prajza and plaintiffs, nor does it reinstate Prajza’s prior
employment with ABT. It does, however, contain a provision
referring to that history. Paragraph 10 of the AIP provides, in
relevant part:
In lieu of the payment to [plaintiffs] of any up-front
licensing fees, scientific support payments, work progress
payments . . . and minimum royalty payments during the first
12 months from the date first above written . . . Rudy
Prajza agrees to forgive any and all accrued salary,
expenses and other amounts payable to him by ABT [] through
the date hereof . . .
AIP ¶ 10.
4
Paragraph 12(d) of the AIP contains a mandatory arbitration
provision. It provides:
This Agreement and the legal relationships among the
parties hereto shall be government by and construed in
accordance with the substantive laws of the Province of
Ontario, Canada without giving effect to the principals
[sic] of conflicts of laws thereof. Conflicts between
parties shall be resolved through the Arbitration Act,
Ontario, held in the City of Toronto.
AIP ¶ 12(d).
Plaintiffs and defendants executed the AIP on June 24, 2010.
Problems between the parties developed immediately. Plaintiffs
allege that defendants breached the AIP by, among other things,
changing the price at which they promised to sell AQISS,
misrepresenting information about plaintiffs on ACL’s website,
and failing to abide by the terms and conditions of the Roddick
Agreement. On August 19, 2010 ABT sent a letter to ACL
terminating all of ACL’s rights under the Roddick Agreement. On
September 13, 2010, plaintiffs sent a letter to all defendants
terminating the AIP. The next day, defendants ACL and Ontario
responded by delivering to the plaintiffs a Notice to Arbitrate
in Ontario, Canada. Defs.’ Motion to Stay, Declaration of
Jonathan Stainsby (“Stainsby Decl.”) Ex. A. (“Notice to
Arbitrate”). The Notice to Arbitrate sought, inter alia, a
declaration that the AIP had not been terminated, an
interpretation of the AIP, a declaration regarding ACL’s
obligations under the Roddick Agreement, specific performance of
5
the AIP, and damages for breach of contract. Notice to Arbitrate
p. 2.
Plaintiffs informed the defendants that they would not
participate in the arbitration. Stainsby Decl. Ex. B. Instead,
a week later, on September 20, 2010, plaintiffs filed a one count
complaint alleging Fraud in the Inducement of the AIP in the
Superior Court for the District of Columbia. Defendants removed
the case to this Court, citing “two independently sufficient
grounds for removal . . . the Federal Arbitration Act §§ 203 and
205 . . . [and] diversity[.]” Notice of Removal, Doc. No. 1 at 1-
2. Following removal, defendants immediately moved to stay this
case pending completion of the arbitration initiated by ACL and
Ontario and “pending the outcome of any such claims as ABT may
seek to bring in arbitration under the [AIP].” Defs.’ Mem. in
Support of Motion to Stay at 9.
Shortly after the parties finished briefing Defendants’
Motion to Stay, an arbitrator appointed by the Ontario Supreme
Court of Justice issued his decision on the claims that ACL and
Ontario had asserted in arbitration. Defs.’ Notice of Decision,
Doc. No. 10. Plaintiffs did not participate in the arbitration
proceedings. Defendants argued that the arbitrator’s decision
should not impact their motion for a stay in this Court, noting
that “the arbitrator’s decision does not affect [defendants’]
entitlement to a stay of these proceedings under the Federal
6
Arbitration Act until after ABT commences and completes an
arbitration of its claim[s] . . . the claims asserted by ABT [in
litigation] remain subject to the arbitration clause and this
action must be stayed pending arbitration.” Defs.’ Notice of
Decision at 2.
On January 31, 2011, plaintiffs filed a Motion for Leave to
File an Amended Complaint. The amended complaint contains eight
counts. Counts One and Two are common law claims of negligence,
breach of contract, and conversion against Prajza only, and arise
from Prajza’s 2007 Employment Agreement with ABT. Count Three
alleges fraudulent inducement to enter into the AIP against all
defendants. Count Four alleges the defendants breached the AIP
in several ways, including that ACL breached its obligations
under the Roddick Agreement as incorporated into the AIP. Count
Five asserts that Prajza converted plaintiffs’ property by
registering the AQISS website in his own name. Count Six claims
Prajza made false statements and representations to plaintiffs in
2009 regarding his interest in again working for ABT. Count
Seven claims fraud in the arbitration proceeding. Finally, Count
Eight asserts defendants tortiously interfered in plaintiffs’
business relationships by contacting one of Nano’s owners and
Andy Roddick regarding the parties’ underlying disputes.
Plaintiffs seek a declaratory judgment that the AIP is void, that
the arbitrator lacks jurisdiction, and that the decision of the
7
Canadian arbitrator is not binding on plaintiffs, an injunction
preventing defendants from using the Roddick endorsement, and
damages of $330 million. Defendants have opposed the motion for
leave to amend, and have renewed their motion to stay the
proceedings pending arbitration. The motions are ripe for review
by the Court.
II. STANDARD OF REVIEW
A. Leave to Amend the Complaint
Under Federal Rule of Civil Procedure 15(a)(1), a party may
amend its pleading once as a matter of course within twenty-one
days after serving it, or, if a pleading is one to which a
responsive pleading is required, within twenty-one days after
service of a responsive pleading or within twenty-one days after
the defendant files a motion under Rule 12(b), (e) or (f),
whichever is earlier. Fed. R. Civ. P. 15(a)(1). Once the time
to amend a pleading as a matter of course elapses, a plaintiff
may amend the complaint with leave of the Court. Fed. R.
15(a)(2). The Rule directs courts to “freely give” leave to
amend a complaint “when justice so requires.” Id. “If the
underlying facts or circumstances relied upon by a plaintiff may
be a proper subject of relief, he ought to be afforded an
opportunity to test his claim on the merits.” Foman v. Davis,
371 U.S. 178, 182 (1962). Accordingly, courts should grant leave
to amend “in the absence of undue delay, bad faith, undue
8
prejudice to the opposing party, repeated failure to cure
deficiencies, or futility.” Richardson v. U.S., 193 F.3d 545,
548-49 (D.C. Cir. 1999) (citing Foman, 371 U.S. at 182).
B. Stay of Proceedings Pending Arbitration
When considering “a motion to stay proceedings and/or compel
arbitration, the appropriate standard of review for the district
court is the same standard used in resolving summary judgment
motions” under Federal Rule of Civil Procedure 56(a). Brown v.
Dorsey & Whitney, LLP, 267 F. Supp. 2d 61, 67 (D.D.C. 2003).
“Thus, it is appropriate to grant a motion to stay proceedings
when the pleadings and the evidence demonstrate that there is no
genuine issue as to any material fact and that the moving party
is entitled to judgment as a matter of law.” Detoledano v.
O’Connor, 501 F. Supp. 2d 127, 137 (D.D.C. 2007) (citing Fed. R.
Civ. P. 56.) The party seeking a stay of proceedings bears the
initial burden of demonstrating an absence of genuine issues of
material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 325
(1986).
In determining whether a genuine issue of material fact
exists, the Court must view all facts in the light most favorable
to the non-moving party. See Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 597 (1986); Keyes v. Dist. of
Columbia, 372 F.3d 434, 436 (D.C. Cir. 2004). The non-moving
party’s opposition, however, must consist of more than mere
9
unsupported allegations or denials and must be supported by
affidavits or other competent evidence setting forth specific
facts showing that there is a genuine issue for trial. See Fed.
R. Civ. P. 56(a); Celotex, 477 U.S. at 324. If the evidence
favoring the non-moving party is “merely colorable, or is not
significantly probative, summary judgment may be granted.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).
Summary judgment will be granted, therefore, if the plaintiffs
fail to offer “evidence on which the jury could reasonably find
for” the plaintiffs. Id. at 252.
III. ANALYSIS
There are two motions pending before the Court. First, the
plaintiffs move for leave to amend their complaint. Second,
defendants have moved for a stay of all proceedings pending
arbitration. The Court considers each motion in turn.
A. Plaintiffs’ Motion for Leave to Amend
Plaintiffs seek leave to file an amended complaint, which
they have tendered to the Court. As discussed above, a party may
amend its complaint once as a matter of course before being
served with a responsive pleading. Fed. R. Civ. P. 15(a).
Because a motion to stay is not a responsive pleading, see Fed.
R. Civ. P. 7(a) (defining “pleadings”), and because this is
plaintiffs’ first attempt to amend the complaint, they are
10
entitled to amend their complaint without leave of the Court.2
See Stender v. Cardwell, No. O7-2503, 2009 WL 3158134, at *5 (D.
Colo. Sept. 28, 2009). Accordingly, plaintiffs’ motion to amend
is GRANTED.3
B. Defendants’ Motion to Stay Proceedings Pending
Arbitration
The defendants argue that all of plaintiffs’ claims in the
Amended Complaint are covered by the parties’ arbitration
agreement in the AIP, and accordingly, this case must be stayed
pending arbitration of those claims. Plaintiffs assert two main
arguments in response. First, plaintiffs assert that the
arbitration agreement is not valid, because the AIP was obtained
by fraud in the inducement. Second, they argue that even if the
arbitration clause is valid, its scope is limited and does not
encompass many of the claims asserted in this litigation.4 The
2
Even if leave of the Court were required in order to
amend the complaint, the Court would grant it. Defendants have
failed to show undue delay, bad faith, undue prejudice, repeated
failure to cure deficiencies, or futility. Leave to amend would
therefore be appropriate pursuant to Federal Rule of Civil
Procedure 15(a)(2).
3
Because plaintiffs’ motion to amend is granted,
defendants’ initial motion to stay, filed before plaintiffs moved
to amend, is DENIED AS MOOT.
4
Plaintiffs also claim that defendants’ request for a stay
is moot because the arbitrator has already rendered his decision
on defendants’ claims; thus, “there is no longer any reason to
stay the instant proceeding.” Pls.’ Response to Notice of
Arbitrator’s Decision at 3. This argument is without merit. As
defendants point out, they seek a stay not only to arbitrate
their claims against plaintiffs, but also to preclude plaintiffs
11
Court will first set forth the governing law, and then will
explore plaintiffs’ claims in turn.
i. Applicable Law
Defendants invoke the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards [1970] 21 U.S.T. 2517, 330
U.N.T.S. 38, reprinted at 9 U.S.C. § 201 (“New York Convention”)
to request a stay in this action pending arbitration of
plaintiffs’ claims. The New York Convention governs enforcement
of an arbitration clause contained within an international
commercial contract such as the AIP. See Mitsubishi Motors Corp.
v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 616 (1985). The
New York Convention is implemented in the United States through
the Federal Arbitration Act (“FAA”), 9 U.S.C. § 201, which
provides “the [New York Convention] shall be enforced in United
States courts in accordance with this chapter.”
For an arbitration provision to be enforceable under the New
York Convention, “(1) there must be a written agreement; (2) it
from litigating their claims against defendants directly in
court. See Defs.’ Reply to Pls.’ Response to Notice of
Arbitrator’s Decision. Section 3 of the Federal Arbitration Act
permits defendant to do exactly that. As this Circuit has held,
“Section 3 empowers a district court only to stay an action,
leaving to the claimant the choice of arbitrating the claims or
abandoning them.” LaPrade v. Kidder Peabody & Co., Inc., 146
F.3d 899, 902 (D.C. Cir. 1998); see also Cabinetree of Wisc.,
Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 389 (7th Cir.
1995) (“a defendant who wants arbitration is often content with a
stay, since that will stymie the plaintiff’s effort to obtain
relief unless he agrees to arbitrate.”). Accordingly,
defendants’ motion for a stay remains properly before the Court.
12
must provide for arbitration in the territory of a signatory of
the convention; (3) the subject matter must be commercial; and
(4) it cannot be entirely domestic in scope.” Smith/Enron
Cogeneration Ltd. P’Ship, Inc. v. Smith Cogeneration Int’l, Inc.,
198 F.3d 88, 92 (2d Cir. 1999). The parties do not dispute that
the New York Convention applies to the AIP’s arbitration
agreement.
As noted above, international arbitrations subject to the
New York Convention are governed by Chapter Two of the FAA.
Chapter One of the FAA applies, however, “to actions and
proceedings brought under [Chapter 2] to the extent that [Chapter
1] is not in conflict with [Chapter 2] or the Convention as
ratified by the United States.” 9 U.S.C. § 208; see Khan v.
Parsons Global Services, Ltd., 521 F.3d 421, 425 n.1 (D.C. Cir.
2008).
The FAA provides that an agreement to arbitrate in any
“contract evidencing a transaction involving commerce” is
enforceable “save upon such grounds as exist at law or in equity
for the revocation of any contract.” 9 U.S.C. § 2. Thus,
arbitration agreements may be invalidated under Section 2 of the
FAA on the basis of “generally applicable contract defenses, such
as fraud, duress, or unconscionability.” Rent-A-Center, West,
13
Inc. v. Jackson, 130 S.Ct. 2772, 2776 (2010) (quoting Doctor’s
Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).5
Once a court determines that an arbitration agreement is
valid - i.e. that the parties have a contract that provides for
arbitration of some issues between them, any doubts concerning
the scope of the arbitration clause are resolved in favor of
arbitration. “In determining the scope of arbitability, there is
a presumption of arbitrability in the sense that an order to
arbitrate the 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. Doubts should be resolved in favor of coverage.”
Granite Rock Co. v. Int’l Brotherhood of Teamsters, 130 S.Ct.
2847, 2866 (2010) (Sotomayor, J., concurring/dissenting) (quoting
5
The Supreme Court has recognized that in some
circumstances, state (or international) contract law applies in
determining whether there is an enforceable agreement to
arbitrate. In cases arising under the New York Convention,
however, there are “compelling reasons to apply federal law,
which is already well-developed, to the question of whether an
agreement to arbitrate is enforceable.” Smith/Enron, 198 F.3d at
96; see also Certain Underwrites at Lloyd’s London v. Argonaut
Ins. Co., 500 F.3d 571, 578-580 (7th Cir. 2007); Intergen N.V. v.
Grina, 344 F.3d 134, 143-44 (1st Cir. 2003); Khan v. Parsons
Global Services, Ltd, 480 F. Supp. 2d 327, 337-38 (D.D.C. 2007),
rev’d on other grounds, 521 F.3d 421 (D.C. Cir. 2008). This is
particularly true where, as here, neither party argues that any
other law applies, and indeed, both parties exclusively cite
federal law. See Smith/Enron, 198 F.3d at 96 (“while the
language [of the agreement] might justify looking to Texas law
. . . , neither party argued that it applied. Thus, we will
apply the body of federal law under the FAA.”); see also Intergen
N.V. 344 F.3d at 143, n.4.
14
AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643,
650 (1986)); see also Wolff v. Westwood Management, LLC, 558 F.3d
517, 520 (D.C. Cir. 2009)(“the [FAA] establishes 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.”)(quoting Moses H. Cone Memorial Hosp.
v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)).
ii. The Arbitration Agreement is Enforceable
As a threshold matter, the Court must determine whether the
arbitration agreement is valid and enforceable under Section 2 of
the FAA. Plaintiffs contend that the arbitration agreement is
invalid because defendants fraudulently induced them into
agreeing to the AIP. See Am. Compl. Count 3, ¶¶ 141-149.
Defendants counter that the plaintiffs have not alleged fraud in
the inducement of the arbitration clause; rather, plaintiffs
claim fraud in the inducement of the AIP as a whole. Defs.’
Reply in Support of Motion to Stay at 2-4. Defendants argue that
this court is not permitted to adjudicate claims of fraud in the
inducement of the contract generally; instead, such claims must
be considered by an arbitrator. Defs.’ Mem. in Support of Motion
to Stay at 7. This Court agrees with the defendants.
15
In Buckeye Check Cashing, Inc. v. Cardegena, 546 U.S. 440
(2006), the Supreme Court noted that “[c]hallenges to the
validity of arbitration agreements . . . can be divided into two
types.” Id. at 444. The first type, which “challenges
specifically the validity of the agreement to arbitrate,” may be
adjudicated by this Court. Id. However, the FAA prohibits a
district court from considering the second type, which challenges
the contract as a whole. Id. at 444-45; see also Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404 (1967)
(“if the claim is fraud in the inducement of the arbitration
clause itself - an issue which goes to the ‘making’ of the
agreement to arbitrate - the federal court may proceed to
adjudicate it. But the statutory language does not permit the
federal court to consider claims of fraud in the inducement of
the contract generally.”)
Here, the plaintiffs allege they were fraudulently induced
into entering into an agreement to do business with Prajza, who
misrepresented the composition of his companies, his connections,
and his abilities. Plaintiffs claim that “such false
representations included, but were not limited to,”
representations that Prajza “had contacts and leads in a number
of foreign countries . . . who would be excellent candidates to
license the plaintiff’s technology and distribute AQISS beverages
in such countries,” that Prajza would “make such introductions
16
and promote such licensing and distribution efforts in the event
that the parties executed an agreement acceptable to Mr. Prajza,”
and that “a list of prominent businessmen were part of the
Defendant companies.” Pls.’ Opp’n to Motion to Stay at 14; Am.
Compl. ¶¶ 75, 77. As defendants point out, plaintiffs do not
allege any “fraud in the inducement of the arbitration clause
specifically. Rather, each and every allegedly false statement
that [plaintiffs] identify as a basis for the alleged ‘fraudulent
inducement’ relates to the parties’ plans and expectations for
their business relationship, and not at all to the A[IP]’s
dispute-resolution mechanism.” Defs.’ Reply at 2-3.
The Court agrees with defendants that plaintiffs have not
alleged fraud in the inducement of the arbitration provision
either in their original complaint or their amended complaint.
Significantly, Count Three of the Amended Complaint - Fraud in
the Inducement - contains no allegation that plaintiffs were
fraudulently induced to specifically enter into the arbitration
clause. Moreover, plaintiffs’ letter terminating the AIP makes
no reference to the arbitration clause. Rather, plaintiffs claim
that the entire “Agreement in Principle was obtained by fraud in
the inducement.” Hovis Decl. Ex. B (Notice of Termination).6
6
The Court has considered plaintiffs’ assertion that they
have long had “a policy against entering agreements containing
arbitration provisions,” but, because of Prajza’s various
misrepresentations, were fraudulently induced “to agree to terms
to which the [plaintiffs] would not otherwise agree (including .
17
Accordingly, the Court finds that plaintiff is challenging the
entire AIP, and not specifically the arbitration clause. This
issue must be resolved by an arbitrator, and not by this Court,
in accordance with Prima Paint and Buckeye. The Court concludes,
therefore, that plaintiff’s attempt to invalidate the arbitration
agreement cannot be sustained, and finds the agreement to
arbitrate is enforceable under Section 2 of the F.A.A.7
iii. The Arbitration Agreement Encompasses All of
Plaintiffs’ Claims in the Amended Complaint
Plaintiffs argue that even if the arbitration clause is
valid and binds them to arbitrate certain claims under the AIP,
it does not encompass all of the claims asserted in their Amended
Complaint. Defendants counter that all of plaintiffs’ claims
fall within the scope of the parties’ broad arbitration
agreement, and thus the entire litigation must be stayed. For
the reasons set forth above, the Court concludes that Count Three
of the Amended Complaint must be stayed. The Court will examine
the remaining counts in plaintiffs’ Amended Complaint in turn.
. . the arbitration provision . . . .).” Pls.’ Opp’n to Motion
to Stay at 13-14; Hovis Decl. at ¶ 12; Am. Compl. ¶ 3. Given the
absence of any factual claim or additional argument that the
arbitration agreement itself was fraudulently induced, however,
the Court is not persuaded that the plaintiffs have indeed
challenged the arbitration provision itself, as opposed to the
AIP as a whole.
7
Although the enforceability of the arbitration provision
is a threshold issue in resolving the entire motion to stay,
plaintiffs specifically raise it in Count Three. Accordingly, the
Court will STAY Count Three of the Amended Complaint.
18
a. Claims Arising from the Alleged Breach of the AIP
Counts Four, Seven and Eight of the Amended Complaint arise
from or relate to the AIP. The Court will address Counts Seven
and Eight briefly, then turn to Count Four.
Count Seven alleges that defendant Prajza committed fraud in
the Canadian arbitration proceeding. Am. Compl. ¶¶ 169-175.
Count Eight alleges defendants tortiously interfered with
plaintiffs’ business opportunities by contacting an
owner/shareholder of Nano and Andy Roddick’s agent in order to
“damage the [plaintiffs’] relationships” with these two
individuals and thus undermine plaintiffs’ business. Am. Compl.
¶¶ 176-185. Defendants argue that these allegations must be
stayed pending arbitration. However, in their opposition,
plaintiffs fail to respond to the defendants’ arguments regarding
Counts Seven and Eight. It is therefore proper to treat
defendants’ arguments as conceded. See Sewell v. Chao, 532 F.
Supp. 2d 126, 135 n.5 (D.D.C. 2008), aff’d Slip Copy, No. 08-
5079, 2009 WL 585660 (D.C. Cir. Feb. 25, 2009); see also Lytes
v. D.C. Water & Sewer Auth., 572 F.3d 936, 943 (D.C. Cir. 2009).8
8
Even if plaintiffs had responded to defendants’
arguments, which they did not, the Court finds it unlikely that
plaintiffs would prevail. As set forth above, the AIP provides
for mandatory arbitration of “conflicts between parties” to the
AIP and contains no language limiting the subject matter of the
conflicts to be arbitrated. AIP ¶ 12. Plaintiffs’ claims in
Counts Seven and Eight clearly fall within the scope of this
extremely broad arbitration clause. Specifically, plaintiffs
argue that the defendants committed fraud in the arbitration
19
The plaintiffs do, however, respond to defendants’ claim
that certain of the breaches alleged in Count Four -
specifically, the breaches which arise from defendant ACL’s
alleged obligations under the Roddick Agreement - fall within the
parties’ arbitration agreement in the AIP.9 It is to this
question that the Court now turns.
As set forth in Section I supra, the AIP contains an
arbitration agreement which governs, without limitation,
“disputes between parties” to the AIP. AIP ¶ 12(d). The AIP
also contains a provision regarding ABT’s agreement to sublicense
to ACL its rights obtained under the Roddick Agreement in order
proceedings agreed to by the parties in the AIP, and interfered
wtih relationships arising out of the parties’ business
relationship, which was governed by the AIP. Because both claims
arise out of the AIP, and have their genesis in it, it is highly
likely that the Court would find these claims “relate to the
subject matter of the arbitration clause” and therefore must be
resolved by an arbitrator. Sweet Dreams Unlimited, Inc. v. Dial-
A-Mattress Int’l, Ltd., 1 F.3d 639, 643 (7th Cir. 1993).
9
Plaintiffs fail to respond defendants’ motion to stay the
remaining claims contained in Count Four, which allege breach of
the AIP in ways unrelated to the Roddick Agreement. Am. Compl.
¶¶ 150-154. Therefore, it is also proper to treat defendants’
arguments regarding these portions of Count Four as conceded. As
with Counts Seven and Eight, however, the Court finds that even
if plaintiffs had responded to defendants’ arguments they would
not prevail. Plaintiffs argue in Court Four that the defendants
breached their contractual obligations under the AIP to, inter
alia, maintain ABT’s website and submit required monthly reports.
These claims clearly arise out of the AIP; indeed, they are
expressly created by it. The Court would therefore also find
that these claims relate to the subject matter of the AIP’s
arbitration clause, and accordingly must be stayed by this Court
pending resolution by an arbitrator.
20
to permit ACL to use the endorsement of Andy Roddick in the
marketing of AQISS. That provision provides:
ABT hereby grants a sublicense to [ACL] of its rights under
that certain agreement dated March 27, 2010, by and between
ABT and Andy R., Inc. (the “Roddick Agreement”) to use the
Athlete Endorsement (as defined in paragraph 1 of the
Roddick Agreement) in [Canada], in accordance with the terms
of the Roddick Agreement, provided that, by executing [the
AIP], [ACL] agrees to be bound by all of the terms and
conditions of the Roddick Agreement and to take all
necessary and reasonable actions to insure ABT’s compliance
herewith pertaining to the marketing and selling of the
[AQISS beverage] in [Canada].
AIP ¶ 2(a). The Roddick Agreement does not contain a mandatory
arbitration provision; rather, it provides that “the legal
relationships among the parties hereto” shall be governed by
Maryland law, and that “any dispute, controversy or claim arising
out of or relating to this Agreement, or the breach, termination
or validity of it, may, upon mutual agreement of the parties
hereto, be finally settled by arbitration[.]” Roddick Agreement ¶
16.
Plaintiffs argue that by agreeing to be bound to “all the
terms and conditions of the Roddick Agreement,” see AIP ¶ 2(a),
ACL is bound to the Roddick Agreement’s dispute resolution
provision and not to the AIP’s arbitration clause, to resolve
disputes with plaintiffs which relate to the Roddick Agreement.
Defendants respond that the only contract the parties all signed
is the AIP, and therefore its dispute resolution process
controls. Defs.’ Supplemental Mem. In Support of Motion to Stay,
21
p. 3-4, 6. After careful consideration, and for the following
reasons, the Court finds plaintiffs’ claims regarding ACL’s
alleged obligations under the Roddick Agreement are arbitrable
under the AIP’s arbitration clause.
As discussed throughout, the arbitration clause in the AIP
is extremely broad. It provides that “conflicts between parties
shall be resolved through the Arbitration Act, Ontario, held in
the city of Toronto” and contains no limits on the subject matter
of the conflicts to be arbitrated. Standing alone, the
arbitration provision clearly encompasses the parties’ conflict
about the sublicensing of Andy Roddick’s endorsement of the AQISS
beverage, particularly since the sublicense was granted in the
AIP. In determining the parties’ intent, however, the Court
“looks to all terms of the parties’ agreement bearing on
arbitration. Even though the words of the agreement’s
arbitration provision may be broad, its scope may be limited by
language elsewhere in the agreement clearly and unambiguously
negating or limiting it with respect to a matter in dispute.”
Woodcrest Nursing Home v. Local 144, Hotel, Hospital, Nursing
Home and Allied Services Union, 788 F.2d 894, 898 (2d Cir.
1986)(citations omitted); see also AT&T Technologies, 475 U.S. at
651-52 (on remand, lower courts must construe entire collective
bargaining agreement to determine whether a particular grievance
was subject to arbitration); Feingold, Alexander & Associates,
22
Inc. v. Setty & Associates, Ltd., 81 F.3d 206, 207-09 (D.C. Cir.
1996) (reading contract as a whole to determine scope of
arbitration clause).
Plaintiffs urge the Court to read the arbitration clause
together with paragraph 2(a) of the AIP, which relates to the
Roddick Agreement, as well as the dispute provision of the
Roddick Agreement. Neither of these provisions, however,
“clearly or unambiguously [] negate[s]” the AIP’s arbitration
clause with respect to conflicts regarding the ACL’s obligation
under the Roddick Agreement. Woodcrest, 788 F.2d at 898.
Section 2(a) contains ACL’s agreement to be bound to the
Roddick Agreement as it relates to “the marketing and selling of
the Finished Products [AQISS beverages] in the Territory
[Canada].” AIP ¶ 2(a). Given the limited scope of ACL’s sub-
license of the Roddick endorsement, its agreement to comply with
“all of the terms and conditions” of the Roddick Agreement cannot
be logically read to mean that every term and condition of the
Roddick Agreement creates an enforceable obligation for ACL.
23
Again, these
provisions create no obligation for ACL. Were the Court to read
paragraph 2(a) as plaintiffs suggest - creating obligations for
ACL under each and every provision of the Roddick Agreement -
these portions of the Roddick Agreement would be rendered
meaningless - a result forbidden by ordinary principles of
contract interpretation. See, e.g., Booker v. Robert Half
Intern., Inc., 413 F.3d 77, 83 (D.C. Cir. 2005) (citing
Restatement (Second) of Contracts § 203(a) (1981)).
Similarly, the Court finds that the dispute resolution
provision in the Roddick Agreement creates no obligation for ACL.
That provision provides for resolution of disputes among the
“parties” to the Roddick Agreement. Roddick Agreement at ¶ 16
(emphasis added). But, as plaintiffs admit, ACL is not a party
to the Roddick Agreement. Am. Compl. ¶ 91. On the other hand,
ACL is a party to the AIP, which contains a mandatory arbitration
provision which covers, without limitation, conflicts between it
and ABT. If, as plaintiffs urge, the Court were to hold that the
dispute resolution provision of the Roddick Agreement allows
plaintiffs to avoid arbitration with ACL, then that clause could
not be squared with AIP’s mandatory arbitration clause covering
all conflicts with ACL. Such an outcome would not comport with
the Court’s duty to harmonize all provisions of a contract and to
reconcile them if possible. See, e.g., Papago Tribal Util. Auth.
24
v. Fed. Energy Regulatory Comm’n, 610 F.2d 914, 929 (D.C. Cir.
1979).
Instead, to reconcile the clauses, the Court reads the plain
language of Roddick Agreement’s dispute resolution to apply only
to parties to that agreement. Accordingly, if ABT has a dispute
with Roddick, the dispute resolution provisions of that agreement
apply. If, however, the parties to the AIP have a conflict, the
AIP’s dispute resolution provision applies. This construction of
the agreements gives meaning to both provisions and nullifies
neither.
Accordingly, the Court concludes that the AIP and the
Roddick Agreement are “susceptible of an interpretation” that
ABT and ACL’s dispute regarding the Roddick Agreement is covered
by the AIP’s arbitration clause. AT&T Technologies, 475 U.S. at
650. This portion of Count Four is therefore STAYED pending
arbitration.10
10
Plaintiffs assert a variety of common law contract
doctrines - incorporation by reference, estoppel, and third party
beneficiary - in support of their claims that ACL is bound by the
dispute resolution provision of the Roddick Agreement. Pls.’
Mem. In Further Support of Opp’n to Motion to Stay at 4-7.
However, plaintiffs admit that every authority they cite in
support of these theories arises in the inverse of the situation
here: i.e., courts use these contract law principles to bind an
entity to a mandatory arbitration provision in a contract it did
not sign. If, as plaintiffs urge, the Court applied these
principles in this case, it would permit a party to escape a
mandatory arbitration provision contained in a contract it
signed. This result would be irreconcilable with the strong
federal policy in favor of arbitration and this Court’s duty to
resolve any doubts concerning the scope of an arbitration clause
25
b. Claims Arising from Rudy Prajza’s Former
Employment with ABT
Counts One, Two, Five and Six of the Amended Complaint arise
from Prajza’s prior employment relationship with ABT.
Specifically, plaintiffs assert that Prajza breached his
employment contract with ABT, committed negligence in his role as
ABT’s Chief Marketing Officer, converted ABT’s property by
registering a website for ABT in his own name while employed by
ABT, and fraudulently induced ABT to obtain an H1-B visa for him
by misrepresenting that he would return to work for ABT. Am.
Compl. ¶¶ 131-140; 155-168.
Plaintiffs argue that their employment-related claims
against Prajza are not subject to the AIP’s arbitration clause
because they arose before the parties entered into the AIP.
Plaintiffs also argue that at least some of these claims are
governed by Prajza’s and ABT’s 2007 Employment Agreement, which
does not contain an arbitration clause.11 Pls.’ Opp’n to Defs.’
in favor of arbitration. Accordingly, the Court finds
plaintiffs’ authority wholly inapplicable to this case.
11
Plaintiffs make the additional argument that the
Canadian arbitrator’s decision requires this Court to hear their
employment-related claims. In his Reasons for Decision, the
arbitrator declined to rule on Prajza’s “personal” damage claims
against plaintiffs arising out of his prior employment
relationship with ABT. See Reasons for Decision, Doc. 10-1 at 4.
Plaintiffs assert that this Court must resolve their claims
regarding Prajza personally because the Canadian arbitrator
refused to resolve Prajza’s similar claims against plaintiffs.
See Id. at 3, 4, 12.
The Court disagrees. Contrary to plaintiffs’ claim, it is
26
Renewed Motion to Stay at 6-9. Defendants counter that the AIP’s
arbitration clause governs all “conflicts between parties,” and,
as Prajza and ABT are indisputably parties to the AIP, ABT’s
claims against Prajza are subject to the parties’ agreement to
arbitrate, even if the events underlying the claims predate
execution of the AIP, and even if they arose under the 2007
Employment Agreement. Defs.’ Renewed Motion to Stay at 6. Upon
careful consideration, the Court agrees with defendants that
these claims are covered by the parties’ agreement to arbitrate.
Several circuits have held that a broad arbitration clause
may encompass claims between the parties that arise out of their
not clear that the arbitrator decided that Prajza’s employment-
related claims fall outside the scope of the parties’ agreement
to arbitrate. As the arbitrator noted, Prajza was not a party to
the arbitration; the only claimants were ACL and Ontario. Defs’
Motion to Stay, Exhibit C, Notice of Application to Arbitrate.
In declining to award employment-related damages allegedly
incurred by Prajza to ACL and Ontario, the arbitrator noted that
such claims “are personal to Mr. Prajza and do not arise in
favour of the Claimants[.]” Notice of Decision at 4.
Accordingly, it appears that the arbitrator did not have the
opportunity to squarely consider whether such claims are within
the scope of the parties’ arbitration agreement. In contrast,
the issue is squarely before this Court. As the Supreme Court
has repeatedly held, it is the role of the courts to determine
what claims are arbitrable under the parties’ agreement to
arbitrate unless the parties have clearly delegated that function
to an arbitrator. See, e.g., AT&T Technologies, 475 U.S. at 649
(courts, not arbitrators, should determine the scope of an
arbitration agreement “unless the parties clearly and
unmistakably provided otherwise.”). Nothing in the AIP suggests
that the parties delegated the question of arbitrability to the
arbitrator, and none of the parties argue that they did so.
Accordingly, the Court concludes that it has the authority to
determine whether these claims are arbitrable.
27
ongoing relationship, even if those claims predate the agreement
to arbitrate and even if the claims are not related to the
subject matter of the agreement containing the arbitration
clause.12 See Coenen v. R.W. Pressprich & Co., 453 F.2d 1209,
1212 (2d Cir. 1972)(an agreement to arbitrate “any controversy
between . . . members” included conflicts that accrued before the
members entered into the agreement, even if they were unrelated
to the agreement). See also Zink v. Merrill Lynch Pierce Fenner
& Smith, 13 F.3d 330, 332 (10th Cir. 1993) (arbitration clause
stating “any controversy between [the parties] arising out of
[plaintiff’s] business or this agreement” was “clearly broad
enough to cover the dispute at issue despite the fact that the
dealings giving rise to the dispute at issue occurred prior to
the execution of the agreement.”); Belke v. Merril Lynch, Pierce,
Fenner & Smith, 693 F.2d 1023, 1028 (11th Cir. 1982) abrogated on
other grounds, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213
(1985) (“By its own terms the contract between the parties covers
not only disputes arising out of the agreement, but . . .
includes “any controversy between us arising out of your
business.” An arbitration clause covering disputes arising out
of the contract or business between the parties evinces a clear
intent to cover more than just those matters set forth in the
12
The D.C. Circuit does not appear to have directly
addressed this situation.
28
contract.”) (emphasis in original).
Indeed, courts have applied broad arbitration clauses to
include disputes arising under earlier agreements between the
parties that did not themselves provide for mandatory
arbitration. In Levin v. Alms & Associates, 634 F.3d 260,(4th
Cir. 2011), the Fourth Circuit determined that an arbitration
clause which provided that “[a]ny dispute shall be submitted to
binding arbitration” was “broad enough to encompass all
agreements and any disputes,” including disputes arising from
earlier agreements with no arbitration provisions. Id. at 267
(emphasis in original). The Levin Court reasoned that the “heavy
presumption . . . in favor of arbitrability is particularly
applicable when the arbitration clause is broadly worded.” Id.
at 266-67; see also Kristian v. Comcast Corp., 446 F.3d 25, 33
(1st Cir. 2006) (agreement to arbitrate “any claim or dispute
relating to or arising out of this agreement or the services
provided” applied retroactively to claims arising from prior
service contracts that did not contain arbitration provision);
Cash Converters USA, Inc. v. Burns, No. 99-C-146, 1999 WL 98345,
at *9 (N.D. Ill. Feb. 19, 1999) (arbitration clause covering all
claims arising out of the agreement as well as claims related to
the parties’ “relationship” encompasses prior agreements with no
arbitration provisions).
In this case, like those cited above, the arbitration
29
provision in the AIP is extremely broad – it requires arbitration
of “conflicts between parties” and contains no language limiting
the subject matter or temporal scope of those conflicts. AIP ¶
12(d). Moreover, the allegations in the Amended Complaint make
clear that ABT and Prajza have had a relationship since at least
2007, spanning the time period during which the incidents alleged
in Counts 1, 2, 5 and 6 occurred. See, e.g., Am. Compl. ¶¶ 30-
35, 43-48, 59-65, 71-73, 74-106. Of particular importance in
this case, the AIP itself contains language recognizing that
Prajza was once employed by ABT and relating back to that
relationship. The AIP does not create or renew an employment
relationship between Prajza and plaintiffs, but nevertheless,
Paragraph 10 of the AIP provides:
In lieu of the payment to [plaintiffs] of any up-front
licensing fees, scientific support payments, work progress
payments . . . and minimum royalty payments during the first
12 months from the [AIP’s effective date] . . . Rudy Prajza
agrees to forgive any and all accrued salary, expenses and
other amounts payable to him by ABT and/or [Nano] through
the date hereof . . .
AIP ¶ 10. This language strongly indicates that the parties
accounted for and attempted to resolve issues relating to
Prajza’s previous employment with ABT in the AIP. At the same
time, they agreed to an extremely broad arbitration clause
covering “conflicts between parties” without limitation. Under
these circumstances, and bearing in mind that this Court is
required to accord a strong presumption in favor of arbitration,
30
the Court concludes that the arbitration clause in the AIP
encompasses plaintiffs’ claims arising out of Prajza’s earlier
employment relationship with ABT.
Plaintiffs cite to several cases in which courts refuse to
give retroactive effect to arbitration clauses. After careful
review, the Court finds these cases unpersuasive as applied to
the facts of this case. Nearly all of the cases relied upon by
plaintiffs contain arbitration clauses which are much narrower
than the arbitration agreement in the AIP, and explicitly
restrict arbitration to claims arising under the contract. See,
e.g., George Washington University v. Scott, 711 A.2d 1257, 1259
(D.C. 1988) (parties agreed to arbitrate “any claim . . . under
this contract”); Security Watch Inc. v. Sentinel Systems, 176
F.3d 369, 372 (6th Cir. 1999) (arbitration required “in
connection with all disputes . . . arising out of or relating to
Products furnished pursuant to this Agreement”); Peerless
Importers, Inc. v. Wine, Liquor & Distillery Workers Union Local
1, 903 F.2d 924, 927 (2d Cir. 1990) (mandatory arbitration of all
claims “arising under this agreement and during its term”).
Plaintiffs cite only a single case - Hendrick v. Brown &
Root - in which the court found a broad arbitration clause
between the parties did not cover claims predating the
arbitration agreement. 50 F. Supp. 2d 527 (E.D. Va. 1999). The
Court finds Hendrick inapposite to the facts of this case. In
31
Hendrick, the contract containing the arbitration provision was
not negotiated at all; rather, it was presented as a take it or
leave it agreement between a sophisticated multinational
corporation on the one hand and a single, unsophisticated
employee on the other. Id. at 529-30. In contrast, the AIP in
this case was the product of protracted negotiation between
several equally sophisticated parties. Moreover, the plaintiff
in Hendrick did not know of the allegedly unlawful prior conduct
by his employer until after he had signed the contract containing
the arbitration clause; accordingly, he never had the opportunity
to pursue his claims in litigation before signing the later
agreement. Id. at 531. In this case, on the other hand, ABT was
clearly unhappy with Prajza’s work when it stopped paying him in
2008, a full two years before executing the AIP. Accordingly,
plaintiffs had ample opportunity to litigate most of their
employment-related claims against Prajza before negotiating a
subsequent agreement agreeing to arbitrate any and all claims
between them. Cf. Davis v. Magnolia, 640 F. Supp. 2d 38 (D.D.C.
2009) (arbitration provision not retroactive where contract was
not product of negotiation between equally sophisticated parties
and where plaintiff had already begun litigating earlier claim
before signing contract containing arbitration provision);
Shelton v. Ritz Carlton Hotel Co., 550 F. Supp. 2d 74 (D.D.C.
2008) (arbitration provision not retroactive where contract was
32
not product of negotiation between equally sophisticated parties
and where claim occurred one month before plaintiff signed
arbitration provision, therefore she had no chance to litigate
it).
Accordingly, given the broad scope of the AIP’s arbitration
clause, and in light of the parties’ clearly expressed intent to
resolve Prajza’s old employment disputes within the body of the
AIP, the Court GRANTS defendants’ motion to stay Counts One, Two,
Five and Six of the Amended Complaint pending arbitration of
plaintiffs’ claims.
IV. CONCLUSION
For the reasons stated above, plaintiffs’ motion to amend
the complaint is GRANTED, defendants’ first motion to stay is
DENIED AS MOOT, defendants’ renewed motion to stay this case in
its entirety pending arbitration is GRANTED. A separate order
accompanies this memorandum opinion. Because this Memorandum
Opinion discusses material which the parties filed under seal in
accordance with the [19] Order entered by the Court in March
2011, it is initially being filed under seal. An appropriate
Order resolving the motions and directing the parties to submit a
redacted opinion for public viewing accompanies this Memorandum
Opinion. Consistent with this Order, the parties shall submit a
33
sealed filing with the Court including their joint proposed
redactions by no later than June 16, 2011.
Signed: Emmet G. Sullivan
United States District Judge
June 2, 2011
34