Entire Energy & Renewables, L.L.C. v. Duncan

[Cite as Entire Energy & Renewables, L.L.C. v. Duncan, 2013-Ohio-4209.]

IN THE COURT OF APPEALS OF OHIO

TENTH APPELLATE DISTRICT

Entire Energy & Renewables, LLC et al., :

Plaintiffs-Appellees, :

v. : No. 12AP-1056
(C.P.C. No. 12CVH05-6603)
Matthew Duncan et al., :
(ACCELERATED CALENDAR)
Defendants-Appellees, :

(EnviroWave Energy, LLC et al., :

Defendants-Appellants). :

D E C I S I O N

Rendered on September 26, 2013

Law Offices of Daniel R. Mordarski LLC, and Daniel R.
Mordarski, for appellees Entire Energy & Renewables, LLC.

Lane, Alton & Horst LLC, and Edward G. Hubbard, for
appellees FWD: Power, LLC.

Ice Miller LLP, Josef Keglewitsch and Stephen Kleinman, for
appellees The Chestershire Group, LLC and The Gary L. Curry
Revocable Living Trust.

Hahn Loeser & Parks LLP, John F. Marsh and F. Allen
Boseman, Jr., for appellants EnviroWave Energy, LLC, John
Novak and Judith Novak.

APPEAL from the Franklin County Court of Common Pleas

TYACK, J.
{¶ 1} This is an appeal from a decision and entry denying defendants-appellants',
EnviroWave Energy, LLC, John Novak and Judy Novak (collectively, "EnviroWave"),
No. 12AP-1056 2

motion to compel arbitration and to dismiss or stay litigation. For the reasons that follow,
we affirm.
Facts
{¶ 2} The following facts are from the allegations in the amended complaint.
{¶ 3} Appellant John Novak and his company, EnviroWave, invented, developed
and patented a technology to use microwave energy to process shredded tires into
renewable energy, fuel, and industrial process commodities. The only existing
EnviroWave Tire System was located in Ashtabula, Ohio. Sometime during 2010, the
project ran out of money and was idled. The tire system continued to be stored at the
Ashtabula location until May 9, 2012.
{¶ 4} In March 2011, Richard Sloan, the CEO of appellee FWD:Power, LLC
("FWD:Power") executed an agreement with EnviroWave to purchase and license tire
systems from EnviroWave. That agreement contained an arbitration clause and was for
territories other than Franklin County, Ohio.
{¶ 5} In addition to his out-of-state dealings with John Novak and EnviroWave,
Sloan and FWD:Power wanted to relocate the existing tire system from Ashtabula, Ohio to
Grove City, Ohio, where a large scrap tire facility was located. Sloan was also
communicating with the purchasers of the existing EnviroWave Tire System, appellants
known as the "Duncan Defendants" and/or appellant Enterprise 620, LLC ("E620"). In
2011, Sloan was introduced to Gary Curry. Curry is the owner of the Chestershire Group
("TCG"), the trustee for appellee, the Gary L. Curry Revocable Living Trust ("Curry
Trust"), and the manager of non-party, Franklic LLC ("Franklic").
{¶ 6} After months of due diligence, and based upon EnviroWave's
representations and silence, FWD:Power, TCG, E620, and the Duncan Defendants
formed and funded the joint venture Entire Energy & Renewables, LLC ("EER"). EER
was formed on September 9, 2011 to secure funding for the move and to obtain a
sublicense for the technology. E620 contributed equipment known as the "Ashtabula
Assets," and those assets were supposedly free and clear of all security interests or other
encumbrances. The Curry Trust provided additional debt financing to the company to
position EER to construct, own, and operate a tire system plant in Franklin County, Ohio
by relocating and utilizing the Ashtabula Assets.
No. 12AP-1056 3

{¶ 7} In December 2011, Curry negotiated and executed on behalf of Franklic, a
written agreement with EnviroWave ("the Franklic Agreement") that granted a limited
license for EnviroWave's technology for the tire systems. Franklic was required to
purchase and build, or relocate at least one tire system in Franklin County, Ohio. Under
Article 2.4 of the Franklic Agreement, Franklic could, at its discretion, sublicense its rights
for the processing of scrap tire shards to EER, and to EER alone in Franklin County. The
Franklic Agreement included an arbitration clause.
{¶ 8} From January through early March 2012, EER continued forward with the
project believing that it had a clear title to the Ashtabula Assets.
{¶ 9} On March 22, 2012, EnviroWave claimed that the Duncan Defendants owed
in excess of $2 million for the tire system and that EnviroWave had a security interest in
the tire system, albeit one that had not been perfected by a filing. EnviroWave
intentionally did not disclose the claimed debt owed by the Duncan Defendants because it
was confidential to EnviroWave and the Duncan Defendants.
{¶ 10} At one point, Duncan admitted to falsifying wire transfers and to owing
EnviroWave some undetermined amount of money for the tire system. He also claimed
he was entitled to various credits because EnviroWave owed him money.
{¶ 11} EnviroWave forbade moving the Ashtabula Assets to Franklin County.
Ultimately, the project was so delayed that the plant was unable to be constructed.
Procedural Posture
{¶ 12} Plaintiffs EER, FWD:Power, TCG, and the Curry Trust brought this action
against the appellants alleging various tort claims arising out of fraud and other torts
allegedly committed by EnviroWave and the Duncan Defendants. Plaintiffs alleged that
EnviroWave made knowing, material misrepresentations with the intent of inducing
FWD:Power, TCG, and the Curry Trust to rely upon those misrepresentations, thereby
inducing the plaintiffs into forming EER. Plaintiffs claimed that EnviroWave engaged in a
conspiracy with the Duncan Defendants and E620 to conceal claims that it was owed
more than $2 million for the Ashtabula Assets. Plaintiffs further claimed that
EnviroWave intentionally interfered in EER's business relationships (of which
FWD:Power was an investor and one-third owner), by making fraudulent
misrepresentations regarding the $2 million debt and by not allowing the transfer or
No. 12AP-1056 4

movement of the Ashtabula Assets. The complaint alleged that all these actions were
made with the intent to induce the plaintiffs to rely upon them, to form EER, and to
proceed with the purchase, relocation, and operation of a tire system plant in Franklin
County.
{¶ 13} EnviroWave moved to compel arbitration and to dismiss or stay litigation
based on the arbitration clauses contained in EnviroWave's December 21, 2011 agreement
with Franklic's and EnviroWave's March 4, 2011 agreement with FWD:Power. The matter
was fully briefed and argued before the trial court. The trial court concluded that the
connection, if any, between the arbitration provisions and the actual claims before the
trial court was "too tenuous." Entry dated December 11, 2012 Denying Motion to Compel
Arbitration, at 2. The trial court stated that the agreements were between entities that
either were not parties to the suit or were not implicated in plaintiffs' claims.
{¶ 14} This appeal followed.
Assignments of Error
{¶ 15} Appellants have assigned the following as errors:
1. The trial court erred by failing to recognize that Appellee
Entire Energy & Renewables, LLC ("EER") was a
contemplated and specifically identified third-party
beneficiary of one of the Agreements and therefore subject to
its arbitration provision.

2. The trial court erred by failing to apply the arbitration
clause broadly and should have found that tort claims
asserted in the underlying case were covered under the
arbitration provision consistent with the strong presumption
favoring arbitration.

3. The trial court erred by failing to apply the correct analysis
identified by this Court and the Ohio Supreme Court —
namely, that a lawsuit must be arbitrated if it cannot be
maintained without reference to the contract that contains the
arbitration provision.

4. The trial court erred when it overlooked the undisputed
fact that at least two of the claims were already being
prosecuted in a pending and ongoing arbitration initiated by
Appellee FWD:Power, LLC ("FWD:Power") against
Appellants.
No. 12AP-1056 5

Standards of Review and Arbitrability

{¶ 16} The question of whether an agreement creates a duty for the parties to
arbitrate is a question of law, and the standard of review on appeal is de novo. Stromberg
v. Ltd. Brands, Inc., 10th Dist. No. 09AP-702, 2010-Ohio-1994, ¶ 10; Council of Smaller
Ents. v. Gates, McDonald & Co., 80 Ohio St.3d 661 (1998).
{¶ 17} Ohio and federal courts recognize four principles that guide arbitrability: (1)
that arbitration is a matter of contract and a party cannot be required to so submit to
arbitration any dispute which he has not agreed to so submit; (2) that the question
whether a particular claim is arbitrable is one of law for the court to decide; (3) that when
deciding whether the parties have agreed to submit a particular claim to arbitration, a
court may not rule on the potential merits of the underlying claim; and (4) that when a
contract contains an arbitration provision, there is a presumption of arbitrability in the
sense that [a]n 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. Academy of Medicine of Cincinnati v.
Aetna Health, Inc., 108 Ohio St.3d 185, 2006-Ohio-657, ¶ 10-14.
{¶ 18} A corollary to the fourth principle is that in determining whether a cause of
action is within the scope of an arbitration agreement, a state court in Ohio may base that
determination on a federal standard that inquires whether the action could be maintained
without reference to the contract or relationship at issue. If it could, it is likely outside the
scope of the arbitration agreement.
Third-Party Beneficiary
{¶ 19} In its first assignment of error, EnviroWave asserts that EER was a third-
party beneficiary of the Franklic Agreement, and therefore bound under the contract's
arbitration provision.
{¶ 20} In Transcontinental Ins. Co. v. Exxcel Project Mgt., Inc., 10th Dist. No.
04AP-1243, 2005-Ohio-5081, ¶ 19-20, we explained the concept of a third-party
beneficiary. Also, as this court stated in Berge v. Columbus Community Cable Access, 136
Ohio App.3d 281 (10th Dist.1999):
No. 12AP-1056 6

A third-party beneficiary is one for whose benefit a promise is
made, but who is not a party to the contract encompassing the
promise. Chitlik v. Allstate Ins. Co. (1973), 34 Ohio App.2d
193, 196 * * * An intended beneficiary has enforceable rights
under the contract, in contrast to an incidental beneficiary,
who has no rights of enforcement. Hill v. Sonitrol of
Southwestern Ohio (1988), 36 Ohio St.2d 36, 40. * * * To have
an intended beneficiary, the contract must be entered into
with the intent to benefit that person. Doe v. Adkins (1996),
110 Ohio App.3d 427, 436.

Id. at 303. "Thus, where the performance of a promise under the contract satisfies a duty
owed by the promisee to the third-party beneficiary, he or she is an intended beneficiary,
but where the performance of a promise merely confers some benefit and is not in
satisfaction of a duty, the third-party beneficiary is an incidental beneficiary."
Transcontinental at ¶ 20.
{¶ 21} Here, EER is not a signatory to the Franklic Agreement. It may have been
the intention of the parties to benefit EER under the contract, but the actual wording of
the agreement does not give EER any rights under the contract. The key portion of the
agreement that names EER provides, in pertinent part, as follows:
2.4 EnviroWave acknowledges that Franklic, LLC intends to
form additional entities to operate the Equipment and Tire
Systems to produce the Product in the Territory, the
ownership of which will vary. Franklic, LLC may sublicense
its rights for the processing of scrap tire shards within
[Franklin County, Ohio] only to the joint venture Entire
Energy & Renewables, LLC. This joint venture may not
further license or sublicense any rights associated with the
Technology. Franklic, LLC may sublicense its rights for the
processing of plastics and the processing of shingles to
additional entities, subject to the prior written approval by
EnviroWave, the consent for which shall not be unreasonably
withheld.

(Emphasis added.)

{¶ 22} The "may" language in section 2.4 does not create any enforceable rights
under the Franklic Agreement for EER. If FWD:Power decided not to sublicense its rights
to operate the plant and instead chose to construct and operate the plant under its own
license, EER would have no recourse under the Franklic Agreement to demand that
No. 12AP-1056 7

FWD:Power grant it a sublicense. Nor would EER have any claim under the contract
against EnviroWave. Thus, EER had no rights under the contract that it could enforce,
and consequently is not an intended beneficiary to the Franklic Agreement.
{¶ 23} Another reason EER is not bound under the Franklic Agreement is that
EER is not asserting claims that arose under the agreement, but rather claims that sound
in tort.
{¶ 24} In Jankovsky v. Grana-Morris, 2d Dist. No. 2000-CA-62 (Sept. 7, 2001),
children of an account holder brought an action against a brokerage firm based on the tort
of interference with an expectancy of inheritance or gift. The court addressed the
argument that an account holder's children were bound under an arbitration clause
because their lawsuit arose from their status as third-party beneficiaries. The court
indicated the issue was not whether the children had standing to bring an action as third-
party beneficiaries; instead, the issue was whether they were asserting their claims on that
basis. While acknowledging that parties cannot avoid arbitration by casting contract
claims as torts, the court stated that a tort claim does not become contractual simply
because an element of proof may relate to a contract. As non-signatories to the agreement
containing the arbitration clause, their claims sounded in tort and were not based on the
contracts containing arbitration clauses. Therefore, regardless of their status as third-
party beneficiaries, the children were not subject to the contractual arbitration provisions.
Id.
{¶ 25} Here, there can be no application of the arbitration clause in the first license
agreement between FWD:Power and EnviroWave executed in March 2011. As the
Supreme Court of Ohio has stated, "the existence of a contract between the parties does
not mean that every dispute between the parties is arbitrable." Academy of Medicine of
Cincinnati, 2006-Ohio-657 at ¶ 29. Under that agreement, FWD:Power is not licensed to
operate EnviroWave's technology in Ohio. FWD:Power's involvement in the Franklin
County project is limited to its minority ownership of EER. EER could not have been a
third-party beneficiary to the March 2011 agreement because EER had not yet been
formed at the time FWD:Power and EnviroWave entered into the agreement. Therefore,
the March 2011 agreement has no application to the claims in this case.
No. 12AP-1056 8

{¶ 26} Because EER is no more than an incidental beneficiary under the Franklic
Agreement and is not involved at all in the FWD:Power/EnviroWave Agreement, the
arbitration provisions in those agreements do not bind EER to arbitrate its claims.
{¶ 27} We recognize that arbitration is not limited to claims alleging breach of
contract and that creative pleading cannot overcome a broad arbitration provision. Id. at
¶ 19. However, the overarching issue is whether the parties agreed to arbitrate the issue.
Id. Furthermore, none of the claims arise out of any performance obligation under the
contracts. The first assignment of error is overruled.
Use of the Correct Presumptions and Standards
{¶ 28} In its second assignment of error, EnviroWave asserts that the trial court
failed to apply the arbitration clause broadly and consistently with the strong
presumption favoring arbitration.
{¶ 29} There exists a strong public policy in favor of arbitration, but not in any or
all circumstances. "Ohio and federal courts encourage arbitration to settle disputes."
ABM Farms, Inc. v. Woods, 81 Ohio St.3d 498, 500 (1998). This presumption applies to
parties to the agreement, " ' "and a party cannot be required to submit to arbitration any
dispute which he has not agreed so to submit." ' " Council of Smaller Enterprises, at 665,
quoting AT&T Technologies at 648-69, quoting United Steelworkers of Am. v. Warrior &
Gulf Nav., 363 U.S. 574, 582 (1960). There can be no presumption in favor of arbitration
if the party in litigation has not agreed to submit its disputes to arbitration. If a party has
not signed an arbitration agreement, a presumption arises against arbitration. Id.; State
ex rel. Rogers v. Philip Morris, Inc., 10th Dist. No. 06AP-1012, 2008-Ohio-3690, ¶ 19.
{¶ 30} Here, EER is a non-signatory to the contracts containing arbitration clauses.
Thus, there is no presumption in favor of arbitration when construing the contracts at
issue. The trial court was not required to interpret the arbitration clause broadly and
consistently with the presumption of arbitrability. In fact, the presumption against
arbitrability applied since EER was not a signatory to the agreements. The second
assignment of error is overruled.
{¶ 31} In their third assignment of error, EnviroWave claims the arbitration
clauses at issue were written with extremely broad language and, therefore, if the lawsuit
cannot be maintained without reference to the license and sublicense provided under the
No. 12AP-1056 9

Franklic Agreement, the action must be covered under the arbitration proceeding. In
support of this argument, Envirowave believes the analysis in Academy of Medicine of
Cincinnati, 2006-Ohio-657; Fazio v. Lehman Bros., Inc., 340 F.3d 386, 395 (6th
Cir.2003), applies to the instant case.
{¶ 32} In both of those cases, the parties to the agreements containing broad
arbitration provisions were the parties in litigation. In Fazio, the plaintiffs were account
holders who had brokerage account agreements that contained arbitration clauses. The
plaintiffs filed suit against the brokerage houses that had employed a stockbroker engaged
in a massive fraud scheme. They alleged securities laws violations, theft, churning,
unauthorized trading, and excessive risk taking. The court stated that even real torts can
be covered by arbitration clauses if the allegations underlying the claims touch matters
covered by the agreement. Id. at 395. The court agreed and remanded the matter for a
determination of whether the arbitration clauses, analyzed independently from the
account agreements, were valid.
{¶ 33} In Academy of Medicine of Cincinnati, 2006-Ohio-657, the plaintiffs were
the Academy of Medicine, the Butler County Medical Society, and various physicians.
They sued a large HMO, alleging conspiracy to maintain artificially low reimbursement
rates in violation of Ohio antitrust provisions. The HMO moved to compel arbitration
based on a broad arbitration clause in the physicians' provider agreements with the HMO.
{¶ 34} The Supreme Court of Ohio found the federal Fazio analysis to be consistent
with Ohio law, interpreting the test as whether the action could be maintained without
reference to the contract or relationship at issue. It found the claims to be within the
scope of a broadly worded arbitration provision that covered any disputes about the
parties' business relationships.
{¶ 35} The crucial distinction between those cases and the instant case is that EER
was neither a party nor an intended beneficiary under the license agreements. EER never
agreed to arbitrate anything. EER's status as an incidental beneficiary means that it could
not enforce any provisions of the Franklic Agreement, therefore it could not be bound by
any arbitration provision within the Franklic Agreement.
{¶ 36} We are not aware of cases involving non-signatories, or non-third-party
beneficiaries to have an arbitration clause construed in the manner of Fazio and Academy
No. 12AP-1056 10

of Medicine of Cincinnati, even an extremely broad provision. The primary issue remains
as whether the parties intended to arbitrate the claims.
{¶ 37} The third assignment of error is overruled.
Ongoing Arbitration
{¶ 38} In its fourth assignment of error, EnviroWave argues that it was error for
the trial court to overlook the fact that FWD:Power was asserting the same fraud and
tortuous interference claims in an arbitration initiated by FWD:Power as well as making
the same claims in the instant action.
{¶ 39} FWD:Power and EnviroWave entered into a licensing agreement for
territories other than Franklin County, Ohio. FWD:Power invoked the arbitration process
for claims arising under that license agreement. Those claims are distinct from the tort
claims in this case which were brought by FWD:Power, not as licensee, but as an investor
and one-third owner of EER, and who was not bound by the Franklic Agreement that
covered the Franklin County, Ohio territory.
{¶ 40} The fourth assignment of error is overruled.
{¶ 41} Having overruled the four assignments of error raised in the case, the
judgment of the Franklin County Court of Common Pleas is affirmed.
Judgment affirmed.
KLATT, P.J., and T. BRYANT, J., concurs.

T. BRYANT, J., retired, of the Third Appellate District,
assigned to active duty under the authority of Ohio
Constitution, Article IV, Section 6(C).