United States Court of Appeals,
Fifth Circuit.
No. 93-7317.
SNAP-ON TOOLS CORPORATION, Plaintiff-Appellant,
v.
Barney MASON, Jr. and Sandra Mason, Defendants-Appellees.
April 15, 1994.
Appeal from the United States District Court for the Southern District of Texas.
Before HIGGINBOTHAM and WIENER, Circuit Judges, and KAUFMAN,* District Judge.
FRANK A. KAUFMAN, District Judge:
On January 24, 1989, Barney Mason entered into a written Dealer Agreement with Snap-On,
pursuant to which Mason became a non-exclusive distributor of various Snap-on tools. The Dealer
Agreement includes the following provision governing arbitration of disputes between the parties:
RESOLUTION OF DISPUTES—ARBITRATION. Any controversy or dispute arising out
of or relating to this Agreement, or breach thereof including, but not limited to, any claim by
the Dealer relating to termination of this Agreement by the Company or any other claim
against an employee, officer or director of the Company, shall be submitted to final and
binding arbitration as the sole and exclusive remedy for any such controversy or dispute. Any
request for arbit rat ion shall be filed in writing within six (6) months following the alleged
breach; otherwise, the right to any remedy shall be deemed forever waived and lost.
On September 9, 1992, Barney and his wife, Sandra Mason, served Snap-on with a petition
which they had filed in the District Court for Matagorda County, Texas, against Snap-on and four
of its present or former employees. Snap-on is a Delaware corporation with its principal place of
business in Wisconsin; the four individual-employee defendants and the Masons are all citizens of
Texas. In the state co urt complaint, the Masons allege fraudulent inducement into the dealership
contract, fraud during the executory time of the contract, breach of fiduciary duty, and negligent and
intentional infliction of emotional distress.
In response to the state court complaint Snap-on and its co-defendants filed a general denial
*
District Judge of the District of Maryland, sitting by designation.
and a motion to stay proceedings in the state court pending arbitration.1 On October 5, 1992,
Snap-on sent a written demand for arbitration to the Masons to which the Masons did not respond.
On February 12, 1993, Snap-on filed a petition and complaint in the United States District Court for
the Southern District of Texas to compel arbitration pursuant to section 4 of the Federal Arbitration
Act ("FAA" or "the Act"), 9 U.S.C. § 4.2 Snap-on invoked the diversity jurisdiction of the district
court on the basis of complete diversity of citizenship between Snap-on and the Masons. The four
non-diverse co-defendants in the state court action are not plaintiffs in the federal court action and
are not parties to the arbitration agreement.
The Masons responded to the petition to compel arbitration with a motion to dismiss. On
April 30, 1993, the district court granted the Masons' motion to dismiss on abstention grounds.3 The
1
The Masons have not responded in the state court to Snap-on's motion to stay the state court
proceedings. As of the date of the district court's dismissal, the state court had taken no action
with regard to either the complaint or the motion to stay. Shortly before arguments were heard in
this appeal, the state court granted Snap-on's motion for a stay pursuant to § 3 of the FAA and
sua sponte ordered Barney Mason to arbitrate.
9 U.S.C. § 3 provides:
If any suit or proceeding be brought in any of the courts of the United
States upon any issue referable to arbitration under an agreement in writing
for such arbitration, the court in which such suit is pending, upon being
satisfied that the issue involved in such suit or proceeding is referable to
arbitration under such an agreement, shall on application of one of the
parties stay the trial of the action until such arbitration has been had in
accordance with the terms of the agreement, providing the applicant for the
stay is not in default in proceeding with such arbitration.
2
Section 4 provides in pertinent part:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United States district
court which, save for such agreement, would have jurisdiction under Title 28, in a
civil action ... of the subject matter of a suit arising out of the controversy between
the parties, for an order directing that such arbitration proceed in the manner
provided for in such agreement.
9 U.S.C. § 4.
3
On April 8, 1993, at a Scheduling Conference, the district court directed Snap-on to file a
formal motion to compel arbitration by April 30, 1993, and to file an opposition to the motion to
dismiss by May 14, 1993. Snap-on filed its motion to compel arbitration on April 30, 1993, the
same day the district court issued its Order granting the Masons' motion to dismiss. In its Order,
the district court expressly forbade the parties from filing anything further in this case in the
district court gave primarily five reasons for its grant of the motion, stating that: (1) in order to
determine whether Snap-on is entitled to arbitration the court would have to hold a trial, a course of
action it did not want to pursue; (2) there was no reason why Snap-on should not pursue its
arbitration claim in the state court; (3) Snap-on had likely filed the motion to compel arbitration
because it had missed the thirty day deadline for filing a petition of removal; (4) a plaintiff's choice
of forum is entitled to deference; and (5) Snap-on was motivated to file its federal claim because it
feared the pro-plaintiff orientation of the state court. Snap-on appeals the district court's dismissal.
"In enact ing the Federal Arbitration Act, Congress declared a national policy in favor of
arbitration," Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338, 342
(5th Cir.1986) (citing Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984)).
"[C]ongress' clear intent, in the Arbitration Act, [was] to move the parties to an arbitrable dispute out
of court and into arbitration as quickly and easily as possible." Moses H. Cone Memorial Hospital
v. Mercury Construction Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 940, 74 L.Ed.2d 765 (1983).
In its opinion granting the motion to dismiss, the district court noted the federal po licy in
favor of arbitration, but declined nonetheless to enforce the arbitration agreement. "We review de
novo the district court's decision not to compel arbitration." Catholic Diocese of Brownsville v. A.G.
Edwards & Sons, Inc., 919 F.2d 1054, 1056 (5th Cir.1990).
The district court's decision conflicts with the Supreme Court's decision in Moses H. Cone,
460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). In Moses H. Cone, a hospital filed a state court
suit against a construction contractor and an architect raising a number of claims against the
contractor arising out of the construction contract between the hospital and the contractor and also
contending that the contractor had, by not proceeding timely, lost its right to arbitrate. That contract
contained a broadly worded arbitration provision. In the state court suit, the hospital included several
claims against an architect who was involved in the construction project, but who was not a party to
the disputed contract. The contractor mailed a demand for arbitration to the hospital the same day
the hospital's complaint was served upon the contractor. The hospital then obtained an ex parte
district court.
injunction from the state court prohibiting the contractor from taking any steps toward arbitration.
After the contractor objected, that stay was dissolved and the contractor filed an action in federal
district court seeking an order compelling arbitration under § 4 of the FAA. After the district court
stayed the federal proceedings before it, the Fourth Circuit, on appeal by the contractor, reversed and
directed the district court to order arbitration. The Supreme Court affirmed.
In so doing, Justice Brennan noted the principles of abstention set forth in Colorado River
Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976):
"Abstention from the exercise of federal jurisdiction is the exception, not the rule. "The
doctrine of abstention, under which a District Court may decline to exercise or postpone the
exercise of its jurisdiction, is an extraordinary and narrow exception to the duty of a District
Court to adjudicate a controversy properly before it. Abdication of the obligation to decide
cases can be justified under this doctrine only in the exceptional circumstances where the
order to the parties to repair to the State Court would clearly serve an important
countervailing interest.' "
Moses H. Cone, 460 U.S. at 14, 103 S.Ct. at 936 (emphasis added) (quoting Colorado, 424 U.S. at
813, 96 S.Ct. at 1244) (quoting County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188-89,
79 S.Ct. 1060, 1062-63, 3 L.Ed.2d 1163 (1959)). Colorado River permits federal courts to abstain
from exercising their jurisdiction over a case where "considerations of "[w]ise judicial administration,
giving regard to conservation of judicial resources and comprehensive disposition of litigation' " so
warrant. Colorado River, 424 U.S. at 817, 96 S.Ct. at 1246 (quoting Kerotest Mfg. Co. v. C-O-Two
Fire Equip. Co., 342 U.S. 180, 183, 72 S.Ct. 219, 221, 96 L.Ed. 200 (1952)).
The considerations discussed in Colorado River, and/or in Moses H. Cone, include the
following: (1) whether the state or federal court has assumed jurisdiction over the res; (2) the
inconveniences of the federal forum; (3) the desirability of avoiding piecemeal litigation; and (4) the
order in which jurisdiction was obtained by the concurrent forums. Moses H. Cone, 460 U.S. at 16,
103 S.Ct. at 937 (citing Colorado River, 424 U.S. at 818-820, 96 S.Ct. at 1246-1248). In Moses H.
Cone the Supreme Court added an additional factor to the balance—(5) whether a federal policy is
involved. Id. 460 U.S. at 23, 103 S.Ct. at 941. None of these factors are determinative; rather, they
require "a careful balancing of the important factors as they apply in a given case, with the balance
heavily weighted in favor of the exercise of jurisdiction." Moses H. Cone, 460 U.S. at 16, 103 S.Ct.
at 937.
Applying these considerations to the facts before it, the Court in Moses H. Cone concluded
that the exceptional circumstances test of Colorado River was not met, and that therefore abstention
was inappropriate. Id. 460 U.S. at 19, 103 S.Ct. at 938 ("[T]he first two factors mentioned in
Colorado River are not present here.... The remaining factors—avoidance of piecemeal litigation,
and the order in which jurisdiction was obtained by the concurrent forums—far from supporting the
stay, actually counsel against it.").
A careful review of the five factors enunciated in Moses H. Cone reveals that the district
court should have ordered arbitration in this case.4 As in Moses H. Cone, the first factor, regarding
the res, has no bearing on the facts of the instant case. The second factor, inconvenience of the
federal forum, while a relevant consideration, does not support abstention here. The Masons argue
that they will suffer increased costs if the federal court asserts jurisdiction over this case because the
state court is closer t o their home. They provide no other evidence of inconvenience; both the
federal suit and any arbitration will likely occur in Texas, where the Masons reside. More specifically,
at least some increased cost appears to have arisen from the Masons' resistance to arbitration and
their litigating in two court systems, in a manner hardly in accord with the Supreme Court's approach
that, "[c]ontracts to arbitrate are not to be avoided by allowing one party to ignore the contract and
4
The district court's decision cannot be sustained on the basis that determining whether
Snap-on is entitled to arbitrate would require a "full-fledged trial," since in FAA suits, the federal
courts conduct "an expeditious and summary hearing, with only restricted inquiry into factual
issues" bearing on the making of the arbitration agreement. Moses, 460 U.S. at 22, 103 S.Ct. at
940.
Further, the district court's position that Snap-on may have been trying to get into
federal court after failing timely to remove is not valid. Snap-on could not remove the
state court case to federal court in any event because the presence of the co-defendants
destroys diversity. 28 U.S.C. §§ 1332, 1441.
Finally, the district court's assumption that Snap-on could have brought its suit in
state court may or may not be soundly based. This is because the Supreme Court has
expressed reticence on this issue, by noting that although states courts must grant stays
pursuant to § 3 of the FAA, "[i]t is less clear ... whether the same is true of an order to
compel arbitration under § 4 of the Act." Moses H. Cone, 460 U.S. at 26, 103 S.Ct. at
942 (noting the "probable inadequacy of the state-court proceeding to protect [the] rights"
of the party seeking arbitration).
resort to the courts. Such a course could lead to prolonged litigation, one of the very risks the
parties, by contracting for arbitration, sought to eliminate." Southland Corp. v. Keating, 465 U.S.
1, 7, 104 S.Ct. 852, 856, 79 L.Ed.2d 1 (1984).
The Masons rely most heavily on the third factor, the avoidance of piecemeal litigation. They
contend that the tort claims alleged in their state court suit are not arbitrable under the contract and
therefore will have to be litigated in a separate forum. Further, they assert that some of the parties
will not participate in the arbitration, namely Sandra Mason and the individual co-defendants, none
of whom were parties to the arbitration agreement, again resulting in some claims being litigated in
another forum.
The terms of the arbitration agreement suggest that, practically speaking, piecemeal litigation
may well not result. The arbitration agreement mandates arbitration of claims for breach of the
Dealer Agreement as well as for claims "arising out of or relating to" the Dealer Agreement. Because
the tort claims all arise out of the business relationship between the opposing parties, it appears that
they are arbitrable under the terms of the agreement. The arbitration agreement also provides that
Barney Mason must arbitrate not only claims against Snap-on, but also claims against any "employee,
officer or director" of Snap-on. Thus Barney Mason's claims against the Snap-on employees may be
subject to arbitration, even though t hose defendants are not parties to the agreement. Further,
according to Snap-on, the individual co-defendants may be willing to participate in the arbitration
proceeding.
However, even if some piecemeal litigation does result, that sometimes is the inevitable result
of a congressional policy strongly favoring arbitration. The Supreme Court in Moses H. Cone noted
that although arbitration could result in the hospital being forced to resolve its dispute against the
architect in a different forum than its dispute against the contractor,
"That misfortune ... is not the result of any choice between the federal and state courts; it
occurs because the relevant federal law requires piecemeal resolution when necessary to give
effect to an arbitration agreement. Under the Arbitration Act, an arbitration agreement must
be enforced notwithstanding the presence of other persons who are parties to the underlying
dispute but not to the arbitration agreement."
460 U.S. at 20, 103 S.Ct. at 939.
With regard to the fourth factor, concerning which forum first acquired jurisdiction over the
action, the Masons assert that because the state court suit was filed first, that court should retain
jurisdiction. The dist rict court also relied on the priority in filing in its reasoning. However, the
Supreme Court in Moses H. Cone characterized as "mechanical" a similar argument in that case and
noted that in the arbitration context, such an argument "disregards the obvious reason for the ...
priority in filing. An indispensable element of [the contractor's] cause of action under § 4 for an
arbitration order is the Hospital's refusal to arbitrate.... That refusal did not occur until less than a
day before the Hospital filed its state suit." Id. at 21, 103 S.Ct. at 939. See also Municipal Energy
Agency v. Big Rivers Elec. Corp., 804 F.2d 338, 344 (5th Cir.1986).
In this case, Snap-on had no notice that the Masons would repudiate their apparent duty to
arbitrate until the state court suit was filed, and therefore, there is no reason why Snap-on should be
expected to have filed the within suit before that date. That the state of Texas may have some interest
in maintaining jurisdiction over this litigation has no bearing in a case such as this one, where the
federal policy favoring arbitration prevails "notwithstanding any state substantive or procedural
policies to the contrary." Moses H. Cone, 460 U.S. at 24, 103 S.Ct. at 941. Moreover, we note that
when the district court chose to abstain, the state court had not substantially proceeded towards
disposition of the case. In Moses H. Cone, Justice Brennan commented that "the federal suit was
running well ahead of the state suit at the very time that the District Court decided to refuse to
adjudicate the case." 460 U.S. at 22, 103 S.Ct. at 940.
As to the fifth Moses H. Cone factor, whether federal law controls the case, the Masons
contend that because state law governs the underlying dispute, their claims against Snap-on should
be heard in state court. However, in this federal case—concerning only whether the case should be
submitted to arbitration under § 4 of the FAA—federal law provides the rule of decision on the
merits. Id. at 24, 103 S.Ct. at 941. The basic issue presented in this suit, as in Moses H. Cone, is
"the arbitrability of the dispute" between the opposing parties, and federal law governs that issue
whether it is raised in federal or state court. Id. at 24, 103 S.Ct. at 941.
Despite the obvious applicability of Moses H. Cone to the facts of the instant case, the
Masons present several additional arguments with which they attempt to distinguish this case from
Moses H. Cone. In that context, they contend that the individual state defendants are indispensable
parties to the within case under Fed.R.Civ.P. 19 and that the presence of all of them destroys diversity
jurisdiction.5 Without diversity jurisdiction, the federal courts would have no subject matter
jurisdiction over this case.6 According to the Masons, the co-defendants are indispensable because
"any resolution by arbitration does not adjudicate all issues of law and fact between the Masons and
all potential defendants."
Under Rule 19(a)(1), joinder is required if "in the person's absence complete relief cannot be
accorded among those already parties." This is essentially what the Masons are co ntending.
However, such a contention merely re-states the "piecemeal litigation" argument which the Supreme
Court rejected in Moses H. Cone. In Moses H. Cone, the existence of the state suit against the
architect did not make the architect "indispensable" to the federal court suit. While the Supreme
Court recognized that any suit against the architect would necessarily take place in another forum if
the architect did not consent to arbitration, nonetheless, that result did not warrant abstention. Id.
at 19-21, 103 S.Ct. at 938-940.
In a further attempt to demonstrate "exceptional circumstances" warranting abstention, the
5
Under Rule 19, joinder is required if:
(1) in the person's absence complete relief cannot be accorded among those
already parties, or (2) the person claims an interest relating to the subject of the
action and is so situated that the disposition of the action in the person's absence
may (i) as a practical matter impair or impede the person's ability to protect that
interest or (ii) leave any of the persons already parties subject to a substantial risk
of incurring double, multiple, or otherwise inconsistent obligations by reason of the
claimed interest.
"When joinder of someone described in Rule 19(a) is not feasible [because it will deprive
the court of subject matter jurisdiction], the court must examine ... Rule 19(b) to
determine whether the action may go forward in his absence or must be dismissed...." 7
Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure
§ 1604, at 41 (1986). Because in this case joinder is not required under 19(a), see infra, it
is unnecessary for this court, in this appeal, to go on to address the 19(b) standards.
6
Although the Arbitration Act creates a body of substantive federal law governing arbitration
agreements, it does not provide a basis for federal question jurisdiction. "[T]here must be
diversity of citizenship or some other independent basis for federal jurisdiction before [an order
compelling arbitration] can issue." Moses, 460 U.S. at 25 n. 32, 103 S.Ct. at 942 n. 32.
Masons claim that Snap-on waived its right to arbitration by failing to request arbitration within six
weeks of the Masons' written notice to Snap-on that Snap-on had violated the contract. The Masons
assert that they provided written notice to Snap-on on January 23, 1992, that Snap-on was in breach
of the contract. Although the district court did not consider this argument, and we therefore have
no factual record with regard to this matter, even if we assume arguendo that the Masons' factual
assertion is correct, their waiver claim lacks merit.
"[F]ifth Circuit precedent places a "heavy burden' on a party claiming waiver of arbitration
rights." Storey v. Shearson-American Express, 928 F.2d 159, 163 (5th Cir.1991) (quoting Frye v.
Paine, Webber, Jackson & Curtis, Inc., 877 F.2d 396, 398 (5th Cir.1989)). "Accordingly, we indulge
a presumption against finding waiver." Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th
Cir.1991). Herein, the Masons' waiver contention is based upon the arbitration clause of the
agreement which in pertinent part provides: "Any request for arbitration shall be filed in writing
within six (6) mo nths following the alleged breach; otherwise, the right to any remedy shall be
deemed forever waived and lost." From Snap-on's perspective, there was no possible breach of the
dealer agreement to arbitrate until the Masons sought to avoid arbitration and filed their suit in state
court. Under the agreement, a party who alleges a breach must request arbitration within six months.
The plain language of the agreement, as well as common sense, reveals that the agreement does not
require an arbitration request to be made upon notice of an alleged breach, only upon an actual
breach. By filing its request for arbitration within one month of the Masons' state court filing,
Snap-on complied with the dealer agreement.7 The fact that the breach alleged by the Masons may
have occurred more than six months before Snap-on requested arbitration cannot under any
commonsense interpretation of the arbitration clause bar Snap-on of the right to arbitrate since
Snap-on had no way of knowing what the Masons would do until they did it.
7
We acknowledge that questions of waiver go to the substantive merits of the petition to
compel arbitration, i.e., whether the claim is arbitrable. Because the district court abstained from
addressing the merits, we could remand this case to the district court to reconsider the petition in
the light of this Court's guidance. However, where abstention is clearly unwarranted, as it
appears to be in this case, the appellate court should consider the merits itself and move this
litigation along. See Burns v. Watler, 931 F.2d 140, 147 (1st Cir.1991).
Finally, the Masons argue that they were fraudulently induced to enter the dealership
agreement and they proffer certain facts concerning such alleged inducement. However, the merits
of the underlying dispute are for the arbitrator to consider, not for this Court or the district court.
Under § 4 of the FAA, the federal district court ascertains only whether the arbitration clause covers
the allegations at issue. "If the dispute is within the scope of the arbitration clause, the court may not
delve further into the merits of the dispute." Municipal Energy, 804 F.2d at 342 (citing City of
Meridian v. Algernon Blair, Inc., 721 F.2d 525, 528 (5th Cir.1983)).
The fact that the Masons make general allegations of fraud does not alter this analysis. In
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270
(1967), the Supreme Court "held that, under section 4 of the FAA, the "making' of an agreement to
arbitrate was not called into question by the allegation that the entire contract was fraudulently
induced. Therefore, the Court concluded, the fraudulent inducement question was properly resolved
by an arbitrator rather than a court." Mesa Operating Ltd. Partnership v. Louisiana Intrastate Gas
Corp., 797 F.2d 238, 244 (5th Cir.1986) (citing Prima Paint, 388 U.S. at 403-04, 87 S.Ct. at 1805-
1806); see also Municipal Energy, 804 F.2d at 342. Only if the allegation of fraud goes specifically
to the making of the agreement to arbitrate must a district court address the merits of the fraud claim.
The district court does not address "claims of fraud in the inducement of the contract generally."
Prima Paint, 388 U.S. at 404, 87 S.Ct. at 1806. As in Prima Paint and Mesa Operating, the
defendants in this case have "not argued that the agreement to arbitrate is invalid separately from the
entire contract. Thus the arbitration provision remains separate and enforceable...." Mesa Operating,
797 F.2d at 244.
In sum, the Masons have not demonstrated "exceptional circumstances" which support
abstention; rather, Moses H. Cone makes clear that in this case, as in most cases, a "liberal federal
policy favoring arbitration" prevails, and abstention is unwarranted. 460 U.S. at 24, 103 S.Ct. at 941.
In the light of the foregoing discussion, we reverse the district court and remand with direction to that
court to enter an appropriate order compelling arbitration.
REVERSED AND REMANDED.