Norgren, Inc. v. Ningbo Prance Long, Inc.
Filing
36
ORDER denying 12 Defendant's Motion to Compel Arbitration and Stay Court Proceedings, by Magistrate Judge Craig B. Shaffer on 09/22/15.(nmarb, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 14-cv-03070-CBS
NORGREN, INC., a Delaware corporation,
Plaintiff/Counter-defendant,
v.
NINGBO PRANCE LONG, INC., a People’s Republic of China corporation,
Defendant/Counter-plaintiff.
ORDER DENYING DEFENDANT’S MOTION TO COMPEL
ARBITRATION AND STAY COURT PROCEEDINGS
Magistrate Judge Shaffer
This matter comes before the court on Defendant Ningbo Prance Long, Inc.’s (hereinafter
“NPL”) Motion to Compel Arbitration and Stay Court Proceedings (doc. #12), filed on
December 24, 2014. Plaintiff Norgren, Inc. filed its Response in Opposition (doc. #17) on
January 14, 2015. This case has been referred to the Magistrate Judge upon the parties’ consent
pursuant to the District Court’s Pilot Program to Implement the Direct Assignment of Civil
Cases to Full Time Magistrate Judges and 28 U.S.C. § 636(c).
On February 19, 2015, the court heard oral argument on the pending motion. At the
conclusion of that hearing, the court invited the parties to file supplemental briefs to address case
law cited by the court in its comments from the bench. Both sides filed supplemental briefs on
February 27, 2015. On August 20, 2015, following the Tenth Circuit’s decision in Pre-Paid
Legal Servs., Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015), the court held a hearing to allow
1
counsel an opportunity to address whether, or to what extent, that decision impacts the pending
motion. I have carefully considered the parties’ briefs and attached exhibits, reviewed the entire
case file, and conducted my own legal research. This court has also reviewed the transcript from
the hearing on February 19, 2015 and considered the arguments presented during the August 20th
hearing. For the reasons set forth below, I will deny Defendant NPL’s motion.
PROCEDURAL BACKGROUND
Plaintiff Norgren initiated this action on November 13, 2014 by filing a Complaint (doc.
#1), seeking “a declaratory judgment that “Norgren properly terminated [it’s] Purchase
Agreement [with NPL],” that “NPL defaulted in the First Arbitration,” that “NPL has waived its
right to pursue its claims in the [Second] Arbitration,” and “[t]here is no valid arbitration
agreement between Norgren and NPL.” Norgren also requests “injunctive relief enjoining the
proceedings in the [Second Arbitration].” Defendant NPL filed Counterclaims Against Norgren,
Inc. (doc. #10) on December 23, 2014, seeking a declaration that “NPL’s and Norgren’s
agreement [to arbitrate their disputes] is valid, binding, and enforceable” and an “order from this
Court declaring Norgren is required to arbitrate the claims NPL submitted to the AAA for
arbitration pursuant to the parties’ agreement to arbitrate.” In the alternative, NPL is asserting in
this action claims for breach of contract, breach of the duty of good faith and fair dealing,
violation of the Colorado Commercial Code, and unjust enrichment. On January 13, 2015,
Norgren filed an Answer to Counterclaim (doc. #16) claiming, inter alia, that “NPL’s damages,
to the extent it has any, are barred by the doctrine of offset” since NPL’s alleged failure to
perform under the terms of the Purchase Agreement caused “Norgren losses exceeding $3
million.”
2
From a careful reading of the parties’ briefs and attachments, it appears the following
material facts are not in dispute. Norgren (headquartered in Littleton, Colorado) and NPL
(headquartered in the People’s Republic of China) entered into a Purchase Agreement in
December 2006. See Exhibit A (doc. #12-1) attached to NPL’s Motion to Compel Arbitration.
Under the terms of that agreement, NPL (the “Seller”) committed to produce various die-cast
molded parts and maintain tooling, fixtures and other equipment owned by Norgren (the
“Buyer”) and supplied to NPL. It was understood that the parts produced by NPL ultimately
would be incorporated into various Norgren-manufactured products. In the Purchase Agreement,
NPL acknowledged Norgren’s continuing ownership of tooling and other enumerated equipment,
and agreed to deliver that equipment “in good working condition, reasonable wear and tear
excepted, to [Norgren] immediately upon request by [Norgren].” Id. at Attachment B to
Purchase Agreement (doc. #12-2, at page 20 of 28). The Purchase Agreement further stated in
Attachment B that “Buyer may, by notice in writing to Seller, terminate the Purchase Agreement
or work there under, in whole or in part, at any time and such termination shall not constitute
default.”
In such event, Buyer will pay Seller Agreement price for finished goods covered
by this agreement held in Seller’s inventory provided product is completed to
specifications and accepted by Buyer. . . . Buyer shall have the right to cancel for
default all or any part of the Purchase Order upon the occurrence of any of the
following events: (a) Seller does not make deliveries or furnish services according
to the terms specified . . .
Id. at 20-21 of 28.
Under the terms of the Purchase Agreement, Norgren and NPL agreed that “[a]ny
controversy or claim arising out of or relating to [the] Terms and Conditions [of the Purchase
Agreement] or the Purchase Order, or the making, performance or interpretation thereof . . . shall
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be settled by binding arbitration.” More specifically, the Purchase Agreement stipulated that
arbitration proceedings would take place in Denver, Colorado before one arbitrator in
accordance with the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA Rules"), and that “[j]udgment upon any arbitration award may be entered in any court
having jurisdiction thereof.” Id. at Attachment B to Purchase Agreement (doc. #12-2, at page 21
of 28). It was also agreed that the “Purchase Order shall be interpreted and construed in
accordance with the laws of the State of Colorado.” Id. at Attachment B to Purchase Agreement
(doc. #12-2, at page 22 of 28)
At some point after 2006, the parties’ business relationship soured. According to
Norgren, NPL failed to produce parts that met the quality standards and delivery requirements
set out in the Purchase Agreement. Norgren also asserted that NPL refused to return its tooling
and other fixtures upon Norgren's demand, as contractually required under the Purchase
Agreement. For its part, NPL accused Norgren of failing to pay for goods and other benefits
conferred by NPL. On April 30, 2009, Norgren informed NPL in writing that Norgren’s board
of directors had decided to terminate the Purchase Agreement effective immediately.
On November 18, 2009, pursuant to the Purchase Agreement, NPL initiated arbitration
proceedings (hereinafter the “First Arbitration”) by submitting to the AAA and serving on
Norgren a Demand for Arbitration and Statement of Claim. See Exhibit B (doc. #12-3) attached
to NPL’s Motion to Compel Arbitration. That Statement of Claim asserted that NPL was owed
more than $1.5 million based on Norgren’s alleged failure to pay amounts due under the
Purchase Agreement. On December 23, 2009, Norgren filed its Answer and Counterclaim in the
First Arbitration, admitting that “certain NPL invoices [had] not been paid,” but also asserting
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that
NPL is attempting to collect for goods that did not meet the quality standards
required under the terms of the Purchase Agreement; that NPL is attempting to
collect for goods that were not ordered or were otherwise not required to be
produced under the terms of the Purchase Agreement; that damages and losses
sustained by Norgren as a consequence of NPL’s many breaches of the Purchase
Agreement, as set forth in the counterclaim below, far exceed the amount that
NPL claims.
See Exhibit C (doc. #12-4) attached to NPL’s Motion to Compel Arbitration. In its
Counterclaim, Norgren sought in excess of $3 million “for all of the losses and damages that it
has sustained as a consequence of NPL’s breaches of the Purchase Agreement and the
conversion of Norgren’s property.” Norgren’s Answering Statement and Counterclaim was
accompanied by a check in the amount of $8,000 reflecting Norgren’s share of the arbitration
filing fee. See Exhibit C (doc. # 17-5), attached to Norgren’s Response in Opposition.
On February 2, 2010, the assigned arbitrator, Robert Benson, forwarded to the parties and
the arbitration case manager a draft Pre-Hearing and Scheduling Order. See Exhibits F-1 and F2 (doc. #17-8), attached to Norgren’s Response in Opposition. Mr. Benson asked the parties to
review “the draft very carefully, and advise me of any additions, deletions, and revisions you
would like me to consider.” On February 4, 2010, Norgren’s counsel forwarded to the
arbitration case manager a check for $1,200 reflecting Norgren’s share of the arbitrator’s
compensation for 8 hours expended on preliminary matters. See Exhibits G-1, G-2 and G-3
(doc. #17-9), attached to Norgren’s Response in Opposition.
Mr. Benson wrote to the parties on February 8, 2010, forwarding a second draft of the
proposed Pre-Hearing and Scheduling Order and again requesting “comments, suggestions,
objections, etc.” Mr. Benson emphasized that the dates incorporated in the draft order “are firm
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unless and until I revise them,” and for that reason, the arbitrator urged the parties to begin
“assembling and exchanging documents for disclosure” and to “expeditiously proceed to fulfill
all other terms of this Draft Order.” In the same letter, Mr. Benson noted
I did not receive any specific comments with respect to Draft #1 from [NPL]
although I was requested to shortening (sic) the time period, etc, as much as
possible. Mr. Qu, I am not sure what you had in mind when you state “if some of
the process can be combined and finished at one time.” Mr. Qu, I might note and
acknowledge the difficulty you have in being in the People’s Republic of China
while the proceedings take place in the United States. Do note that I speak only
English, and hence I have a provision in Draft #2 pertaining to interpreters. Mr.
Qu, I want to accommodate your needs by being in another country. Consistent
(sic.) with not prejudicing [Norgren]. Hence, within those limitations, please let
me know how I might accommodate your particular needs. However do let me
know very soon.
See Exhibits H-1 and H-2 (doc. #17-10), attached to Norgren’s Response in Opposition.
Mr. Benson communicated with NPL’s representative, Mr. Qu, on February 13, 2010.
The arbitrator assured Mr. Qu that he wanted a arbitration that “is full and fair to both parties,”
and that he was required “to follow and comply with the arbitration provisions in the contract
between the parties, which includes the AAA Commercial Rules. When Ningbo Prance Long,
Inc. agreed to those provisions in the contract, it created an obligation to comply with the
contract, including the arbitration provisions.” See Exhibit I-3 (doc. #17-11), attached to
Norgren’s Response in Opposition. On February 23, 2010, Mr. Benson again wrote to Mr. Qu
indicating that he “would most appreciate a response” to his email of February 13, and asking
again for NPL’s input on the draft Pre-Hearing and Scheduling Order. Id.
On that same day, Mr. Qu responded by email, stating that NPL agreed to the schedule
outlined in the draft Pre-Hearing and Scheduling Order. However, NPL “want[ed] to cancel the
process of [Section] IV, as regarding to the hearing, we are not able to be in [USA], do you think
6
the hearing can be held in some other way, like conference call.” See Exhibit I-2 (doc. #17-11),
attached to Norgren’s Response in Opposition. Counsel for Norgren responded to NPL’s
proposal in a separate email to Mr. Benson and Mr. Qu on February 23, 2010. Norgren indicated
a willingness to consider other dates for the hearing in Denver, but
does not waive its right to a hearing in Denver, Colorado as provided in the
parties’ Agreement, and Norgren does object to NPL participating by telephone. .
. . As reflected in NPL’s Demand and Norgren’s Counterclaim, substantial sums
are being sought and the issues are not simple. . . . Norgren believes that it will be
impossible to conduct a fair and meaningful hearing over the telephone.
Regarding Section IV of the draft Order, Norgren agrees that the requirements set
forth therein are important and would help pave the way for an efficient and fair
hearing.1
See Exhibit I-1 (doc. #17-11), attached to Norgren’s Response in Opposition.
On February 24, 2010, Mr. Benson issued a final Pre-Hearing and Scheduling Order in
which he directed each party to submit their Statement of Issues on or before March 10, 2010, to
be followed by an itemization of their damages. Arbitrator Benson also required the parties to
provide document disclosures on or before March 25, 2010. An arbitration hearing was set for
May 18-20, 2010 in Denver, Colorado. See Exhibit L-1 (doc. #17-14), attached to Norgren’s
Responge in Opposition.
More importantly, on February 23, 2010, the arbitrator informed the parties that he had
been advised that AAA “has insufficient funds to cover the first eight hours of my service.
1
Mr. Benson had asked Norgren’s counsel to comment on Mr. Qu’s proposal of February
23 to delete Section IV from the draft Pre-Hearing and Scheduling Order. In that email, Mr.
Benson expressed his “general inclination” that Section IV ‘is important.” See Exhibit I-2 (doc.
#17-11), attached to Norgren’s Response in Opposition. Section IV bears the heading
“AMENDMENT TO PLEADINGS; SPECIFICATION OF CLAIMS; STATEMENT OF THE
ISSUES; STATEMENT (ITEMIZATION) OF DAMAGES” and sets certain deadlines for
submitting those statements to the arbitrator. See Exhibit F-2 (doc. #17-8), attached to Norgren’s
Response in Opposition.
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Accordingly, after issuance of the Pre-Hearing and Scheduling Order, and in conformance with
the rules that the parties agreed to in their arbitration agreement, I will suspend all proceedings
pending receipt . . . . that the outstanding amount has been paid.” Benson also warned that “with
the scheduling of the hearing, [the AAA] will also be requesting deposits to cover the entire
estimated hearing time.”2 See Exhibit I-1 (doc. #17-11), attached to Norgren’s Response in
Opposition. The shortage of required fees was solely attributable to NPL. See Exhibit J-1 (doc.
#17-12), attached to Norgren’s Response in Opposition. The arbitration case manager informed
NPL on February 24, 2010 that it was in arrears in paying an outstanding invoice for Mr.
Benson’s services and warned that “every effort must be made on your part to remit payment of
the due amount to ensure the smooth running of the process. Please remit payment by close of
business March 02, 2010.” See Exhibit K-1 (doc. #17-13), attached to Norgren’s Response in
Opposition.
On March 9, 2010, Norgren forwarded to the arbitrator its Statement of Issues. See
Exhibit 0 (doc. #17-17), attached to Norgren’s Response in Opposition. Two days later,
Norgren’s counsel wrote to Mr. Benson “to respectfully request that the current suspension be
extended to include the deadlines in the Pre-Hearing and Scheduling Order.” See Exhibit P-1
(doc. #17-18), attached to Norgren’s Response in Opposition. Given that “NPL did not provide
a Statement of Issues” as required by the arbitrator, Norgren expressed the fear that its further
compliance with the deadlines in the Pre-Hearing and Scheduling Order “will give NPL
substantial insights into Norgren’s case. It is not, we believe, just or proper that these expenses
2
The February 24, 2010 Pre-Hearing and Scheduling Order contemplated a three-day
hearing.
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be incurred, and the concomitant insight provided, until the suspension is lifted and it becomes
clear that both parties intend to proceed in accordance with the requirements of the [AAA] and
the Arbitrator.” Id. On March 15, 2010, the arbitration case manager advised the parties that
“all the deadlines set in the Pre-Hearing and Scheduling Order are hereby suspended until the
full payment of the outstanding balance by either Party. ” See Exhibit N-1 (doc. #17-16),
attached to Norgren’s Response in Opposition.
Thereafter, the parties, the arbitration case manager, and Mr. Benson exchanged a series
of emails addressing the issue of outstanding fees and the arbitration process itself. On March
25, 2010, in an email to the arbitration case manager, Norgren’s counsel suggested it was
“unlikely that NPL is going to pay either the earlier invoice or the invoice most recently issued.”
Fearing that contingency and wanting time to weigh its options, Norgren asked whether it
“could, without terminating the proceedings, defer making some or all of the payments in the
attached invoice for a reasonable period of time while it evaluates the situation. . . . Lastly, if
NPL does not pay, we would appreciate some estimate of payments that would be required of
Norgren beyond the attached invoice in order to lift the stay and proceed to hearing.” See
Exhibits FF-1 and FF-2 (doc. #17-34), attached to Norgren’s Response in Opposition. The
arbitration case manager responded promptly, explaining that “[Norgren] may pay Claimant’s
share of neutral compensation of $7,350.00 to proceed. If [Norgren] wishes to cover Claimant’s
share of arbitrator compensation, the arbitrator will consider the counterclaim and the claims
filed.” Id.
After arbitration proceedings had been stayed for three months, NPL communicated with
the arbitration case manager on June 16, 2010, stating that
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[W]e want to use the most simple process to arbitrate our case. [T]he only thing
we need you to do is arbitrate Norgren broke the contract and should pay all of
the over due payment to us. [W]e don’t want to have the hearings. [W]e think
eight hours is enough to arbitrate our case. [H]ope you can understand it could be
finished as soon as possible.
See Exhibit BB-1 (doc. #17-30), attached to Norgren’s Response in Opposition. The arbitration
case manager responded the same day, stating that the matter “will remain in abeyance” until
NPL deposited sufficient funds with AAA. The arbitration case manager also observed that the
amount of deposited funds is “based on the Arbitrator’s estimates, not the estimates of the
parties.” Id.
On June 20, 2010, NPL again contacted the arbitration case manager to reiterate its view
that “our case is very easy to be arbitrated . . . the only thing we need you to do is arbitrate
Norgren broke the contract and should pay all of the paid of due to us.” In the same email,
NPL’s representative asked: “[could we make sure the proceeding of arbitration first [and] then
talk about the balance arbitration fee. [W]e want to make sure the process of the arbitration first
since we don’t want to have the hearings.” See Exhibit AA (doc. #17-29), attached to Norgren’s
Response in Opposition. The arbitration case manager wrote back on June 22, 2010, stating that
“after receiving comments from both sides [Mr. Benson] will determine whether he will be able
to make his decision based on document submissions alone and without a hearing.” However,
NPL again was advised that “[w]ithout having sufficient deposit to compensate Mr. Benson, the
arbitration proceeding cannot move forward.” See Exhibit AA (doc. #17-29), attached to
Norgren’s Response in Opposition.
This dialogue resumed on July 13, 2010 with an email that NPL sent to the arbitration
case manager, Mr. Benson, and Norgren’s counsel. In this communication, NPL asked whether
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a hearing “must be held or we can choose [to] cancel it . . . we don’t want to have the hearing.”
In NPL’s view, the matter could be decided “in a simple way” since Mr. Benson was only
required to decide that Norgren breached the Purchase Agreement. See Exhibit CC-4 (doc. #1731), attached to Norgren’s Response in Opposition.
Mr. Benson responded with his own email on July 16, 2010, in which he again pointed
out that the parties had agreed to follow the AAA Rules, which meant that he was “obligated to
follow the arbitration agreement, the Commercial Arbitration Rules of the American Arbitration
Agreement, and applicable law.” Mr. Benson further explained that “either party has the right to
have a hearing in which to present evidence in support of their claims and in defense of the other
party’s claim.” As for NPL’s options, the arbitrator noted that
You can ask the [AAA] and me for leave to withdraw your arbitration claim
against Norgren, Inc. With the consent of Norgren, it is likely that your request
would be allowed. Without the consent of Norgren, you still might be allowed to
withdraw your claim. Perhaps this would depend upon the basis of Norgren’s
objection. It is possible that the only termination of your claim other than an
award would be a dismissal with prejudice, meaning that you could not assert the
claim again. . . . Please also note that if the claims of [NPL] were withdrawn,
dismissed, etc., the arbitration would remain as to the claims of Norgren, Inc.
Those claims would proceed or not proceed in accordance with my Order of July
9, 2010. Further, I note that [NPL] has not complied with my Pre-hearing and
Scheduling Order.
See Exhibits CC-2 and CC-3 (doc. #17-31), attached to Norgren’s Response in Opposition.3
On July 21, 2010, NPL again expressed the view that its case against Norgren was clear
and incontrovertible. For that reason, NPL asked Mr. Benson to “arbitrate Norgren breach the
contract and compensate for large expense due to the breach of agreement.” See Exhibits CC-1
3
As of July 16, 2010, NPL still had not submitted its required statement of issues or an
itemization of the damages it sought to recover.
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and CC-2 (doc. #17-31), attached to Norgren’s Response in Opposition. The arbitration case
manager promptly responded explaining that “[t]he matter is suspended due to lack of payment”
and “no further action will take place until the matter is fully funded by either party.” Id.
On July 29, 2010, NPL sent another email to the arbitration case manager reiterating its
view that “Norgren [has] admitted that they didn’t pay us the over due payment.” For that
reason, NPL believed the parties:
[don’t] need too much time and too much process. [W]e have paid USD8000 for
case service fee. [W]e will pay other fee after we make sure all of the process and
what will you do next. [W]e think our case is very clear so we want you to
arbitrate the case [directly].
See Exhibit EE-2 (doc. #17-33), attached to Norgren’s Response in Opposition. The arbitration
case manager responded to this communication by reminding NPL that the matter had been
suspended for lack of payment and “no further action will take place until the matter is fully
funded by either party.” See Exhibit EE-1 (doc. #17-33), attached to Norgren’s Response in
Opposition (emphasis in original).
NPL wrote again to the arbitration case manager, Mr. Benson, and Norgren’s counsel on
August 11, 2010, restating its position that Norgren had breached the Purchase Agreement and
admits that “they didn’t pay [NPL] the over due payment.”
Our case is lasted for one year long, we emphasize pls arbitrate the case according
the statement as above. [B]ut we never got any specific information from AAA.
Now we emphasize again pls inform us why our case can not be arbitrated since it
takes so long time.
See Exhibits DD-1 and DD-2 (doc. #17-32), attached to Norgren’s Response in Opposition.
Against the backdrop of NPL’s continued failure to pay its required arbitration fees,
Norgren submitted on August 20, 2010, a Memorandum in Support of Motion to Dismiss NPL’s
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Demand with Prejudice. See Exhibit V (doc. #17-24), attached to Norgren’s Response in
Opposition. In its Memorandum, Norgren argued that NPL must either “do that which is
required: pay its share of the invoiced deposit amounts” or “have its claim dismissed with
prejudice.” In contrast, Norgren suggested that its counterclaim should not be dismissed
summarily.
[A]t present, uncertainty remains. While unlikely, NPL may choose to pay its
share. If NPL does not pay, and Norgren’s motion is granted, Norgren may
eventually decide to request that its Counterclaim be dismissed without prejudice.
The costs of going forward on the Counterclaim in arbitration, together with costs
and uncertainties associated with enforcing the Award in China, require further
consideration. Therefore, having fully complied with the Rules and Orders,
Norgren believes that it is entitled to a reasonable period of time, in the range of
three months, following the ruling on this motion to decide how to proceed.
Id.
On September 13, 2010, Mr. Benson issued an Order of Dismissal Without Prejudice.
See Exhibit X (doc. #17-26), attached to Norgren’s Response in Opposition. In his Order, Mr.
Benson noted “the failure of the parties to deposit the estimated administrative expenses and
estimated arbitrator compensation as directed by the [AAA]” and Norgren’s pending Motion to
Dismiss. Citing Rule R-54 of the AAA’s Commercial Rules, Mr. Benson noted that if
“arbitrator compensation or administrative charges have not been paid in full,” he had the
authority to “order the suspension or termination of the proceedings.” The arbitrator specifically
declined to rule on Norgren’s motion and ordered that “the Demand and Counterclaim therein,
be, and hereby are, dismissed without prejudice.” Although Mr. Benson signaled that his Order
“will be withdrawn nunc pro tunc” if the balance of AAA-directed deposits were paid within
seven calendar days, an Order of Confirmation of Dismissal Without Prejudice was entered on
September 30, 2010. See Exhibit Y (doc. #17-27), attached to Norgren’s Response in
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Opposition.
After September 2010, Norgren and NPL engaged in unsuccessful settlement
negotiations. On October 17, 2014, NPL initiated the Second Arbitration by filing a Demand
and Statement of Claim, and paying an administrative filing fee of $12,800. In its Statement of
Claim, NPL asserts claims “aris[ing] out of Norgren’s breaches of contract and violations of the
Colorado Uniform Commercial Code and other applicable laws, including Norgren’s failure and
refusal to pay NPL for amounts due for partes which Norgren ordered, received, and accepted
and otherwise for which Norgren is responsible under the parties’ Purchase Agreement.” See
Exhibit L (doc. #12-13), attached to NPL’s Motion to Compel Arbitration. That Statement of
Claim focuses exclusively on events and conduct that occurred on or before April 30, 2009.
Notably, the Statement of Claim makes no reference, even in passing, to the earlier arbitration
proceeding.
Norgren filed an Objection to Arbitration on November 13, 2014, in which it challenged
“the jurisdiction of the arbitrator and to the arbitrability of NPL’s claims.” See Exhibit D (doc.
#12-18) to the Affidavit of Christina Alabi, attached to NPL’s Motion to Compel Arbitration.
Norgren argued that:
Under federal law, NPL defaulted in the First Arbitration and through this default
NPL has waived any right to enforce the arbitration clause contained in the
parties’ December 22, 2006 Purchase Agreement. . . . Moreover, under applicable
federal law, the questions of whether NPL has defaulted and whether this conduct
waives its right to arbitration are questions for the Court in the first instance.
On the same day, Norgren commenced the instant litigation. NPL’s pending motion followed.
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ANALYSIS
The “liberal federal policy favoring arbitration” is well-recognized. Moses H. Cone
Mem’l. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (2008), superseded by statute on other
grounds by 9 U.S.C. § 16(b)(1). Consistent with this underlying policy, the Federal Arbitration
Act (“FAA”), 9 U.S.C. § 1, et seq., directs that upon motion by a party, the court “shall” stay a
judicial action pending completion of arbitration proceedings, if the court is satisfied that the
issue sub judice is referable to arbitration and “the applicant for the stay is not in default in
proceeding with such arbitration.” See 9 U.S.C. § 3. Alternatively, § 4 of the FAA empowers a
party “to invoke the authority of a federal district court in order to force a reluctant party to
arbitrate a dispute.” Mut. Benefit Life Ins. Co. v. Zimmerman, 783 F. Supp. 853, 865 (D.N.J.
1992) (quoting Painewebber Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir. 1990)). Under that
provision, “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration” may petition the district court “for an order directing
that such arbitration proceed in the manner provided for in such agreement.” See 9 U.S.C. § 4.
“Before [a] party may be compelled to arbitration under the [FAA], the district court
must engage in a limited inquiry to determine whether a valid arbitration agreement exists
between the parties and whether the specific dispute falls within the scope of that agreement.”
Let’s Go Aero, Inc. v. Cequent Performance Prods., Inc., 78 F. Supp. 3d 1363, 1372 (D. Colo.
2015) (quoting Houlihan v. Offerman & Co. Inc., 31 F.3d 692, 694-95 (8th Cir. 1994)). It is
undisputed that the parties’ Purchase Agreement, which Norgren purported to terminate in 2009,
included an arbitration provision. Notwithstanding the federal policy in favor of arbitration, this
court must decide whether the parties remain bound by that arbitration agreement or, stated
15
differently, whether the premature dismissal of the First Arbitration effectively precludes NPL’s
latest attempt to invoke that provision.
An issue or dispute is “arbitrable if it is subject to decision by arbitration or referable to
an arbitrator or arbiter.” Burlington N. and Santa Fe Ry. Co. v. Pub. Serv. of Okla., 636 F.3d
562, 567-68 (10th Cir. 2010) (holding that “[s]o long as the parties have not specifically agreed
to submit the arbitrability question itself to arbitration (i.e., to arbitrate arbitrability), a court will
independently decide whether the merits of the parties’ dispute is arbitrable”). As the Supreme
Court has explained:
[C]ourts presume that the parties intend courts, not arbitrators, to decide what we
have called disputes about “arbitrability.” These include questions such as
“whether the parties are bound by a given arbitration clause,” or “whether an
arbitration clause in a concededly binding contract applies to a particular type of
controversy.” On the other hand, courts presume that the parties intend
arbitrators, not courts, to decide disputes about the meaning and application of
particular procedural preconditions for the use of arbitration. These procedural
matters include claims of “waiver, delay or a like defense to arbitrability.”
BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198, 1206-07 (2014) (internal citations
omitted) (citing with favor Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84-86 (2002)).
Cf. Wolford v. Flint Trading, Inc., No. 13-cv-02835-WYD-CBS, 2014 WL 3747177, at *2-4 (D.
Colo. Jul. 30, 2014) (noting that the question of arbitrability is an issue for judicial determination
unless the parties’ agreement clearly and unmistakenly provides otherwise). Accordingly, this
court must determine whether the parties remain bound by their arbitration agreement.
Norgren contends that NPL forever waived its arbitration rights under the Purchase
Agreement by refusing to pay required fees and defaulting in the First Arbitration. In support of
this argument, Norgren cites with favor the Tenth Circuit’s recent decision in Pre-Paid Legal
Servs., Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015), which in turn relies on Sink v. Aden
16
Enters., 352 F.3d 1197 (9th Cir. 2003). The plaintiff in Pre-Paid Legal Servs. filed an action
against its former employee, Todd Cahill, alleging tort and contract violations. Under Cahill’s
employment contract, all disputes and claims between the parties were to “be settled totally and
finally by arbitration. . . in accordance with the Commercial Arbitration Rules of the American
Arbitration Association.” After Pre-Paid initiated litigation in state court, Mr. Cahill removed
the case to federal court and then moved, without objection, to stay judicial proceedings pending
arbitration. However, once Pre-Paid initiated arbitration proceedings and advanced its share of
the required fees, Mr. Cahill repeatedly declined to pay his portion of those fees.4 The
arbitration panel suspended the arbitration after warning Mr. Cahill that such action would
follow if he failed to make the required payments by a specified date. Thereafter, AAA
terminated the arbitration and closed its file. When the plaintiff moved to lift the stay on judicial
proceedings, Mr. Cahill challenged that ruling.
The Tenth Circuit held that “[f]ailure to pay arbitration fees constitutes a ‘default’ under
[FAA] § 3"5 and that “Mr. Cahill’s failure to pay his share of costs precludes him from seeking
4
The Tenth Circuit noted that “[t]he AAA repeatedly asked [Mr. Cahill] to pay” and that
“Mr. Cahill did not show he was unable to afford payment, ask the arbitrators to modify his
payment schedule, or move for an order requiring Pre-Paid to pay his share for him so that
arbitration could continue. Instead, by refusing multiple requests to pay, he allowed arbitration
to terminate.” Pre-Paid Legal Services, 786 F.3d at 1294.
5
Cf. Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 989 (2d Cir. 1942)
(suggesting that the reference to “default” in § 3 applies to “a party who, when requested, has
refused to go to arbitration or who has refused to proceed with the hearing before the arbitrators
once it has commenced”). See also N & D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722, 728
(8th Cir. 1976) (“A default occurs when a party ‘actively participates in a lawsuit or takes other
action inconsistent with’ the right to arbitration.”) (emphasis added) (quoting Cornell & Co. v.
Barber & Ross Co., 360 F.2d 512, 513 (D.C. Cir. 1966); Kirkpatrick v. People, 179 P. 338
(Colo. 1919) (holding that “the term ‘default’ should be defined as: ‘[a] failure to appear and
contest a point of law or fact by presentation of counter argument or proof’”).
17
arbitration.” Pre-Paid Legal Services, 786 F.3d at 1294-95 and n. 3. In reaching this
conclusion, the Tenth Circuit cited with favor “decisions of other courts that have determined
that a party’s failure to pay its share of arbitration fees breaches the arbitration agreement and
precludes any subsequent attempt by that party to enforce that agreement.” Id. at 1295; see, e.g.,
Brown v. Dillard’s, Inc., 430 F.3d 1004, 1011 (9th Cir. 2005), Sink, 352 F.3d at 1201; Rapaport
v. Soffer, No. 2:10-cv-00935-KJD-RJJ, 2011 WL 1827147, at *2 (D. Nev. May 12, 2011); and
Garcia v. Mason Contract. Prods., LLC,, no. 08-23103-CIV, 2010 WL 3259922, at *3 (S.D. Fla.
Aug. 18, 2010). The Tenth Circuit further held that the question of default under § 3 was not
uniquely reserved for the arbitrator, but could instead be decided by the district court. Pre-Paid
Legal Servs., 786 F.3d at 1298. Applying the analysis in Pre-Paid Legal Services to the facts in
the instant case, I must conclude that NPL defaulted in the First Arbitration by failing to pay its
share of required arbitration fees.
NPL argues that Sink and its progeny, including Pre-Paid Legal Services, are
distinguishable on their facts. First, NPL notes that unlike the arbitrators in Sink, Mr. Benson
did not enter a formal default order, but rather dismissed the First Arbitration without prejudice.
Mr. Benson’s Order does not expressly prelude the possibility of future arbitration proceedings.6
The Tenth Circuit, however, rejected the same argument in Pre-Paid Legal Services, holding that
“the absence of a formal finding of default by the arbitrators does not preclude the district court
from making that determination under § 3.” Id. at 1296.
6
The court notes that Mr. Benson’s email of July 16, 2010 alluded to the possibility that
NPL’s claim could be dismissed with prejudice, “meaning that [NPL] could not assert the claim
again.” See Exhibits CC-2 and CC-3 (doc. #17-31), attached to Norgren’s Response in
Opposition. That passage might suggest Mr. Benson viewed a dismissal without prejudice as
having a different substantive and prospective effect.
18
NPL also notes that in Pre-Paid Legal Services and Sink, judicial proceedings were
commenced and then stayed pursuant to the parties’ arbitration agreement and the mandate in §
3. The appellate courts in those cases held that once the arbitration proceedings were terminated
by default, there was no justification for barring judicial relief. Under NPL’s interpretation of §
3, a party could only be in “default” where judicial proceeds were initiated and then stayed in
favor of arbitration. NPL would have this court effectively re-write § 3 to provide that:
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 . . . shall on application of one
of the parties stay the trial of the action until such arbitration has been had in
according with the terms of the agreement, providing the applicant for the stay is
not in default in proceeding with such [then pending] arbitration.
By extension, NPL argues that Pre-Paid Legal Services is not controlling because NPL has paid
its required fees in the Second Arbitration and is not in default in that particular proceeding.
This argument, however, is squarely at odds with the Tenth Circuit’s unambiguous statement
that “a party’s failure to pay its share of arbitration fees breaches the arbitration agreement and
precludes any subsequent attempt by that party to enforce that agreement.” Pre-Paid Legal
Servs., Inc., 786 F.3d at 1294.
Alternatively, NPL suggests that the dismissal of the First Arbitration has no preclusive
effect because NPL did not waive its rights under the Purchase Agreement. I am aware that the
burden of showing a waiver of the right to arbitrate “is a heavy one in light of the strong federal
policy in favoring arbitration.” Lamkin v. Morinda Props. Weight Parcel, LLC, 440 F. App’x
604, 610 (10th Cir. 2011). However, the Tenth Circuit seems disinclined to distinguish between
a “default” in proceeding with an arbitration and a “waiver of the right to arbitrate,” particularly
where the result under either approach would be the same. See Pre-Paid Legal Servs., Inc., 786
19
F.3d at 1295 n. 3. Cf. Planet Beach Franchising Corp. v. Richey, 623 F. Supp. 2d 735, 738-39
(E.D. La. 2008) (finding, based on a review of case law, that “waiver” and “default” should be
treated synonymously in the context of § 3).
Moving to the merits of NPL’s argument, the Tenth Circuit applies a six-factor test in
determining whether a party has waived their right to arbitrate:
(1) whether the party’s actions are inconsistent with the right to arbitrate; (2)
whether the litigation machinery has been substantially invoked and the parties
were well into preparation of a lawsuit before the party notified the opposing
party of an intent to arbitrate; (3) whether a party either requested arbitration
close to the trial date or delayed for a long period before seeking a stay; (4)
whether a defendant seeking arbitration filed a counterclaim without asking for a
stay of the proceedings; (5) whether important intervening steps [e.g., taking
advantage of judicial discovery procedures not available in arbitration] had taken
place; and (6) whether the delay affected, misled, or prejudiced the opposing
party.
In re Cox Enterprises, Inc., 790 F.3d 1112, 1116 (10th Cir. 2015) (quoting Peterson v. Shearson/
Am. Exp., Inc., 849 F.2d 464, 467-68 (10th Cir. 1988) (suggesting that these six factors should
not be applied mechanically, but rather provide “certain principles that should guide courts in
determining whether it is appropriate to deem that a party has waived its right to demand
arbitration”). Cf. Shy v. Navistar Int’l Corp., 781 F. 3d 820, 827-28 (6th Cir. 2015) (“A party
waives arbitration if it acts in a manner completely inconsistent with any reliance on an
arbitration agreement or delays asserting arbitration to such an extent that the opposing party
incur[red] actual prejudice.”) (internal quotation marks omitted); Apple & Eve, LLC v. Yantai N.
Andre Juice Co. Ltd., 610 F. Supp. 2d 226, 229 (E.D.N.Y. 2009) (“A party waives his right to
arbitrate when he actively participates in a lawsuit or takes other action inconsistent with that
right.”). See also Plaintiffs’ S’holders Corp. v. S. Farm Bureau Life Ins. Co., 486 F. App’x 786,
790-91 (11th Cir. 2012) (suggesting that a party’s right to arbitrate, if previously waived, should
20
be not revived where the new proceeding makes only minor changes to the factual allegations or
claims previously asserted).
Here, the second, third, fourth and fifth factors identified in In re Cox Enterprise cut
against a finding of waiver as NPL has never sought to pursue litigation and never looked to
resolve its disputes with Norgren in a judicial forum. Conversely, NPL’s persistent refusal to
pay required fees in the First Arbitration or to provide the substantive materials requested by Mr.
Benson can be fairly described as actions “inconsistent with the right to arbitrate” as
contemplated by the parties’ Purchase Agreement. Norgren also contends that it has been
prejudiced to the extent that many of the witnesses it intended to use in the First Arbitration have
left Norgren in the intervening four years and may no longer be readily available to testify. Cf.
Planet Beach Franchising Corp., 623 F. Supp. 2d at 739 (in addressing whether a party’s waiver
of an arbitration agreement results in prejudice to the other side, the court should consider “the
inherent unfairness in terms of delay, expenses, or damage to a party’s legal position”). An
application of the Tenth Circuit’s six-factor test does not conclusively favor one side or the other
in this case.
However, the concept of waiver “includes the broader idea that, regardless of intention, a
party’s conduct may be such that it should be prevented on the basis of some equitable principle
from asserting a right to arbitration.” Lamkin, 440 F. App’x at 610 (internal quotation marks
omitted). “Although waiver typically arises in circumstances where one party so substantially
utiliz[es] the litigation machinery that subsequent arbitration would prejudice the opposing party,
it is clear that conduct manifesting an abandonment of [the] arbitration forum [itself] can
constitute waiver.” Liberty Mut. Grp., Inc. v. Wright, No. DKC 12-0282, 2012 WL 1446487, at
21
*3 (D. Md. Apr. 25, 2012) (internal citations and quotation marks omitted). Waiver in such a
non-litigation context requires a showing that the waiving party (1) knew of an existing right to
arbitration, (2) acted in a manner inconsistent with that right, and (3) caused prejudice to the
opposing party through those inconsistent actions. Id. See also N. Street, LLC v. Clipper
Constr., LLC, No. 08–4604, 2010 WL 3523025, at *2 (E.D. La. Sept. 2, 2010) (acknowledging
that the question of default or waiver must be decided on the particular facts of each case);
Brownyard v. Md. Cas. Co., 868 F. Supp. 123, 126 (D.S.C. 1994) ( “There is no set rule as to
what constitutes a waiver or abandonment of an arbitration agreement; the question depends on
the facts of each case.”).
The Purchase Agreement explicitly states that Colorado law is controlling. In Lawry v.
Palm, 192 P.3d 550 (Colo. App. 2008), the Colorado Court of Appeals explained that “[a]
repudiation of a contract must consist of a party’s present, positive, unequivocal refusal to
perform the contract” and “occurs when a party to a contract makes an overt communication of
intention or an action which renders performance impossible or demonstrates a clear
determination not to continue with performance.” Id. at 558 (citing Lantec, Inc. v. Novell, Inc.,
306 F.3d 1003, 1014 (10th Cir. 2002)). A party’s conduct must be measured against an
objective, rather than a subjective standard, and that party’s statements must be sufficiently clear
as to support a reasonable interpretation that the repudiating party will not or cannot perform as
required under the contract. Id. “[L]anguage that is accompanied by a breach of
nonperformance may amount to a repudiation even though, standing alone, it would be
sufficiently positive.” Id.
So, for example, in Samson v. NAMA Holdings, LLC,, 637 F.3d 915, 932 (9th Cir. 2011),
22
the Ninth Circuit held that the trial court properly denied a motion to compel arbitration filed by
two individuals who, in an earlier proceeding, had insisted they were not parties to the arbitration
agreement at issue. The Ninth Circuit noted that if the trial court were to grant the motion to
compel arbitration, these two individuals
would have lost nothing as a result of their refusal to arbitrate claims that were
properly subject to arbitration; in fact, they would stand to gain a significant
benefit, namely, the chance at a “do-over” of the already-completed merits
hearing before the arbitration panel. At a minimum, they would likely be
afforded an opportunity to reopen a closed proceeding and present new evidence.
Id. The court in Samson relied in large part on the earlier decision in Brown v. Dillard’s Inc.,
430 F.3d 1004, 1010 (9th Cir. 2005), which held that “[h]e who seeks to enforce a contract must
show that he has complied with the conditions and agreements of the contract on his part to be
performed.”7 Although the employment contract in Brown required the parties to arbitrate
employment-related claims, the defendant employer refused to pay its share of the arbitration
fees. The Ninth Circuit rejected Dillard’s suggestion that it could compel arbitration
“notwithstanding any possible breach of the arbitration agreement.” Id. The court concluded
that by refusing to participate in properly initiated arbitration proceedings, Dillard had
effectively repudiated the arbitration agreement. Id. at 1011.
Similarly, in this case, the record makes clear that NPL made a deliberate, albeit illadvised, decision to withhold required arbitration fees and ignore the arbitrator’s request for prehearing submissions, notwithstanding the parties’ agreement to be bound by the AAA Rules.
7
The Tenth Circuit, in Pre-Paid Legal Services, cited Brown as authority for the
proposition that a failure to pay required arbitration fees constitutes a default for purposes of § 3
of the FAA. Brown is more properly read as upholding the proposition that a party who
repudiates an arbitration agreement forfeits its right to subsequently compel arbitration.
23
NPL persisted in that course of action despite repeated warnings that the arbitration proceedings
would remain suspended until the required payments were made. NPL never claimed an
inability to pay its share of the fees required by the AAA Rules. Rather, NPL suggested that it
would consider paying additional fees only after Mr. Benson decided NPL’s particular claim for
damages. But see In re Tyco Int’l Ltd. Secs. Litig., 422 F.3d 41, 45 (1st Cir. 2005) (observing
that “nothing in the [parties’ arbitration agreement] . . . . nor in the case law” gave one side “a
unilateral contractual right” to change the terms and conditions of the arbitration process). NPL
deliberately chose to abandon its position in the First Arbitration even in the face of Mr.
Benson’s warning that the arbitration could proceed as to Norgren’s counterclaim. It is difficult
to construe NPL’s actions in the First Arbitration as anything other than a knowing and
voluntarily waiver of its arbitration rights.
The benefits of arbitration (e.g., lower costs, greater efficiency, and speed) are wellrecognized. However, these laudable objectives may be frustrated if an arbitration provision is
exploited as a tool for gamesmanship or evasion. See, e.g., In re Grupo Unidos Por El Canal,
S.A., No. 14-mc-00226-MSK-KMT, 2015 WL 1810135, at *5 (D. Colo. Apr. 17, 2015) (citing
AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1751 (2011)). The Tenth Circuit has
acknowledged that “arbitration laws are passed to expedite and facilitate the settlement of
disputes and avoid the delay caused by litigation. It was never intended that these laws should
be used as a means of furthering and extending delays.” In re Cox Enterprises, Inc., 790 F.3d at
1118 (quoting Radiator Specialty Co. v. Cannon Mills, 97 F.2d 318, 319 (4th Cir. 1938)). Cf.
Menorah Ins. Co., Ltd. v. INX Reinsurance Corp., 72 F.3d 218, 222-23 (1st Cir. 1995)
(“Arbitration clauses were not meant to be another weapon in the arsenal for imposing delay and
24
costs in the dispute resolution process.”); Sucrest Corp. v. Chimo Shipping Ltd., 236 F. Supp.
229, 230 (S.D.N.Y. 1964) (holding that “[d]ilatory conduct or delay, in the face of a known duty
to act,” can be construed as “conduct inconsistent with an intention to arbitrate”). As the First
Circuit explained in In re Tyco Int’l Ltd. Secs. Litig.,“[e]ven as justice delayed may amount to
justice denied, so it is with arbitration.” 422 F.3d at 46. “[A] party should not be allowed
purposefully and unjustifiably to manipulate the exercise of its arbitral rights simply to gain an
unfair tactical advantage over the opposing party.” Id. at 47 n.5.
Based on upon the particular facts and circumstances of this case, and for the foregoing
reasons, this court finds that by virtue of its actions in First Arbitration, NPL defaulted on or
waived its arbitration rights under the parties’ Purchase Agreement and is thereby barred from
asserting those rights anew in the Second Arbitration. Accordingly, Defendant Ningbo Prance
Long, Inc.’s Motion to Compel Arbitration and Stay Court Proceedings (doc. #12) is denied.
This court will enjoin proceedings in the Second Arbitration pending NPL’s decision whether to
seek relief pursuant to 9 U.S.C. § 16(a)(1)(A) and the outcome of any resulting interlocutory
appeal.
DATED this 22nd day of September, 2015.
BY THE COURT:
s/ Craig B. Shaffer
United States Magistrate Judge
25
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