United States Court of Appeals,
Eleventh Circuit.
No. 95-6271.
H.S. GREGORY, G.E. Benson, John C. Erber, Plaintiffs-Appellees,
v.
ELECTRO-MECHANICAL CORPORATION, a Virginia corporation,
Electrical Equipment, Inc., an Indiana corporation, Defendants-
Appellants.
May 21, 1996.
Appeal from the United States District Court for the Northern
District of Alabama. (No. CV 94-L-3081-S), Seybourn H. Lynne,
Judge.
Before ANDERSON and COX, Circuit Judges, and RONEY, Senior Circuit
Judge.
RONEY, Senior Circuit Judge:
The issue in this case is the meaning of the words "arising
hereunder" in the context of an arbitration provision contained in
a larger agreement.
Does that language only require the arbitration of breach of
contract claims, as the district court found, or does it require
the arbitration of other disputes that originate out of or have a
connection with that underlying agreement?
We hold that the agreement requires arbitration of all of the
claims asserted in the complaint in this case, and therefore
reverse the district court's decision restricting arbitration to
the breach of contract claims.
This dispute involves the sale of majority stock by the
plaintiff shareholders, the purchase price being based on the
income of the company for the five years following the closing.
The damage claim is based on the activities of the buyer in
connection with the generation of that income.
There is a detailed, 41-page Stock Purchase Agreement with
1
detailed headings as set forth below and seven Exhibits. The
agreement includes the following arbitration clause:
14.03 Arbitration. After the consummation of the purchase of the
Shares hereunder, any dispute between any of the Parties which
may arise hereunder or under any agreement referred to as an
exhibit herein, and which cannot be settled by mutual
agreement will be referred to arbitration under the Rules of
the American Arbitration Association. The place of
arbitration will be Bristol, Virginia, or such other place as
the parties to the arbitration may otherwise agree upon. The
arbitration award will be final and binding upon the parties
to such arbitration and may be entered in any court having
jurisdiction. The expense of such arbitration will be shared
equally by the parties thereto unless otherwise specified in
the award. Each such party will pay the fees and expenses so
its own witnesses and counsel.
1
ARTICLE I RECITATIONS
ARTICLE II PURCHASE AND SALE OF SHARES
ARTICLE III PURCHASE PRICE AND PAYMENT OF CERTAIN DEBT
ARTICLE IV SHAREHOLDERS' REPRESENTATIONS AND WARRANTIES
ARTICLE V THE BUYER'S REPRESENTATIONS AND WARRANTIES
ARTICLE VI COVENANTS OF THE SHAREHOLDERS
ARTICLE VII COVENANTS OF THE BUYER
ARTICLE VIII CONDITIONS PRECEDENT TO BUYER'S
OBLIGATIONS
ARTICLE IX CONDITIONS PRECEDENT TO SHAREHOLDERS'
OBLIGATIONS
ARTICLE X CLOSING AND CLOSING DATE
ARTICLE XI INDEMNIFICATION BY SHAREHOLDERS
ARTICLE XII INDEMNIFICATION BY BUYER
ARTICLE XIII BROKERAGE
ARTICLE XIV MISCELLANEOUS
Not referenced by the parties is the following paragraph that would
surely come into play as to issues concerning prior negotiations,
omissions, and representations:
1407. Final Writing. This writing and the documents
incorporated herein is intended by the Parties as the final
and binding expression of its contract and agreement and is a
complete and exclusive statement of the terms thereof, and
supercedes all prior negotiations, representations and
agreements. No representations, understandings or agreements
have been made or relied upon in making of this Agreement
other than those specifically set forth herein.
The plaintiffs argue that of the seven counts alleged in the
complaint, six are for causes of action other than breach of
contract, variously phrased in tort terms such as fraud, fraudulent
inducement, deceit, misrepresentation, conversion, breach of good
faith and fair dealing, and outrage. The issue is whether these
claims fall within the scope of the arbitration agreement.
The law is clear that tort claims and claims other than
breach of contract are not automatically excluded from a
contractual arbitration clause. Mitsubishi Motors v. Soler
Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444
(1985) (claims arising under the Sherman Act held arbitrable);
Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.
270 (1974) (fraudulent representation of status of trademark sold
held arbitrable). Whether a claim falls within the scope of an
arbitration agreement turns on the factual allegations in the
complaint rather than the legal causes of action asserted. Sweet
Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Ltd., 1 F.3d 639,
643 (7th Cir.1993) ("a party may not avoid a contractual
arbitration clause merely by casting its complaint in tort.")
(citation omitted); Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815
F.2d 840, 846 (2d Cir.1987) ("If the allegations underlying the
claims "touch matters' covered by the sales agreements, then those
claims must be arbitrated, whatever the legal labels attached to
them.").
Although couched in various terms and theories of action,
every claim in this complaint targets the fact that the plaintiffs
did not receive the amount of money that they thought they should
have for their stock and that the defendant buyer caused that loss.
The structure of the complaint and the allegations of fact
reflect that these claims all arose under the agreement. There are
seven counts, and every count incorporates all of the facts alleged
in the count denominated as a breach of contract claim. Thus, the
complaint itself says that the facts constituting defaults under
the contract are a critical part of the so-called tort claims. If
the buyer had fully complied with the contract, as interpreted by
the plaintiffs, there would be no tort claims.
The plaintiffs' own analysis of the claims reflects that these
claims all arose under the contract. Their brief summarizes the
claims made as set forth in the footnote below.2 It is apparent
2
(a) EMC would cause EEI to pay all debts that were properly
disclosed on EEI's balance sheet; (b) EMC would inject
sufficient funds into and cause EEI to repay Plaintiff Gregory
for the personal loans he had made to EEI because EEI's financial
strength was insufficient for it to repay that indebtedness on a
fixed repayment schedule; (c) EMC would operate EEI in the
utmost good faith and fairness in order to maximize EEI's profits
over the next five (5) years in order to share the maximum
profits possible with the selling shareholders whose payment for
their stock was contingent upon the profits of EEI; (d) EMC
would not increase EEI's general corporate overhead costs by more
than twenty percent (20%) without thirty (30) days prior written
notice to the selling shareholders so that the purchase price for
their stock which was based on profits to be earned by EEI over
the next five (5) years would not be diluted or lost altogether
from reading these claims that the alleged misrepresentations
relate to what the EMC would do under the purchase contract. The
omissions counts allege largely that EMC failed to disclose that it
did not intend to comply with the contract. All of these claims
depend upon EMC's failure to fulfill its perceived obligations in
connection with the sale of stock.
We were told at oral argument that, although the district
court did not state the premise upon which its decision was made,
it relied upon an 11th Circuit case stressed by the plaintiffs to
support the view that only breach of contract claims are
arbitrable. Seaboard Coast Line R.R. v. Trailer Train Co., 690
F.2d 1343 (11th Cir.1982). In Seaboard, this Court affirmed a
denial of arbitration because there were two contracts, and the
dispute did not relate to the one with the arbitration clause. In
other words, if the parties performed the arbitrable contract
perfectly, fulfilling all expectations under that contract, there
would still be a cause of action for breach of the second contract
which was made after the arbitrable contract. Thus Seaboard does
not control this case.
The plaintiffs rely upon In re Kinoshita, 287 F.2d 951 (2d
by excessive overhead; (e) EMC would not transfer or relocate
EEI's products, product lines or assets to its other operating
companies and divisions without a full, fair and proper
accounting of such transfers which could otherwise cause the
purchase price to the selling shareholders of their stock of EEI
which was based on profits for the next five (5) years to be
diminished or lost altogether; and (f) EMC would not permit
intercompany transfers, charges and credits between EEI and EMC's
other operating companies to be handled in a manner so as to
depress the revenues and profits of EEI during the next five (5)
years which could result in a loss of the purchase price to be
paid to the selling shareholders of their stock in EEI.
Cir.1961). In that case, the Second Circuit dealt with an
arbitration clause requiring arbitration if "any dispute or
difference should arise under this agreement." The court, although
noting that "views more favorable to arbitration appear to be
making headway," 287 F.2d at 953, held that that language did not
include fraud in the inducement, apparently because the clause did
not include words such as "or relating to this contract" or "in
connection with" the agreement. As early as 1967, the Supreme
Court held that a claim of fraud that related to inducement of an
agreement generally is covered by an "arising out of or relating to
this agreement" arbitration clause. Prima Paint v. Flood & Conklin
Mfg., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967).
Yet, the Court in Scherk v. Alberto-Culver Co., 417 U.S. 506,
94 S.Ct. 2449, 41 L.Ed. 270 (1974), required no such additional
language to require arbitration of the kind of claims asserted
here. Scherk was a case regarding the purchase of three businesses
along with rights held by the enterprises to trademarks. The buyer
contended that the seller fraudulently misrepresented the status of
trademark rights. The Supreme Court held that arbitration was
required because the claim "arose out" of the contract.
To the extent that the cases binding on this Circuit may have
left Kinoshita intact, we now reject it simply as not being in
accord with present day notions of arbitration as a viable
alternative dispute resolution procedure. The Second Circuit
itself later recognized that the Kinoshita decision was
inconsistent with federal policy favoring arbitration but, although
obviously aware of the incorrectness of the decision, refused to
overrule the case only because lawyers in that circuit may have
"relied on the case in their formulation of an arbitration
provision." S.A. Mineracao Da Trindade-Samitri v. Utah Int'l, 745
F.2d 190, 194 (2d Cir.1984). Only the Ninth Circuit seems to have
followed the decision in Kinoshita. See Republic of Nicaragua v.
Standard Fruit Co., 937 F.2d 469, 479 (9th Cir.1991), cert. denied,
503 U.S. 919, 112 S.Ct. 1294, 117 L.Ed.2d 516 (1992);
Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458,
1464 (9th Cir.1983).
Both the Seventh and Fifth Circuits have more willingly
followed the admonition of the Supreme Court that "[a]ny doubts
concerning the scope of arbitrable issues should be resolved in
favor of arbitration." Moses H. Cone Memorial Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d
765 (1983); Sweet Dreams Unlimited, 1 F.3d at 642; Mar-Len of
Louisiana, Inc. v. Parsons-Gilbane, 773 F.2d 633, 637 (5th
Cir.1985). See Seaboard Coast Line, 690 F.2d at 1348 ("This
federal policy requires that we construe arbitration clauses
generously, resolving all doubts in favor of arbitration.").
This Court has not drawn a distinction between the words
"arising under" and "arising out of." In Seaboard, the language
"[a]ny difference or dispute arising hereunder" was essentially the
same as in this contract. Id. at 1345. This Court said such an
"arbitration clause is broad" and went on to discuss cases with
language like "arising out of or in connection with," and "[a]ny
controversy or claim arising out of or relating to the breach"
without the careful distinctions in language which the plaintiffs
would have us make. Id. at 1349-50.
Judge Medina himself, the writing judge in Kinoshita, would
not have drawn a distinction. In dictum, he stated that he would
have limited the arbitration whether the agreement "refers to
disputes or controversies "under' or "arising out of' the
contract." In re Kinoshita & Co., 287 F.2d at 953. Interestingly,
later cases such as S.A. Mineracao fixed on the difference in the
terms, however, in order to avoid the Kinoshita result. See Sweet
Dreams Unlimited v. Dial-A-Mattress Int'l, 1 F.3d 639, 642 (7th
Cir.1993) ("We are not persuaded by Judge Medina's dicta in
Kinoshita that suggests an equation between "arising under' and
"arising out of.' "). The court had an "arising out of" contract,
required arbitration of rescission and other tort claims, and saw
no need to decide an "arising under" issue. The agreement did not
contain any other modifying words such as "in relation to" or "in
connection with."
Although the Court in Scherk v. Alberto-Culver Co., 417 U.S.
506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), had before it an
arbitration clause that referred to any controversy that "shall
arise out of this agreement or the breach thereof," the Court's
opinion seemed to use "arise out of" and "arise under"
interchangeably.
Because all of the claims alleged in the complaint fall within
the scope of the arbitration clause, this case is remanded to the
district court for entry of a stay of the proceedings pending
arbitration, and an order compelling arbitration, if that is deemed
appropriate by the court.
REVERSED and REMANDED.