PTA-FLA, Inc. v. ZTE USA, Inc.
Filing
20
ORDER granting 7 Motion to compel arbitration; staying case pending outcome of arbitration proceedings; directing Clerk to administratively close the file. Signed by Judge Timothy J. Corrigan on 10/21/2011. (SRW)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
JACKSONVILLE DIVISION
PTA-FLA, Inc., a Florida corporation,
Plaintiff,
vs.
Case No. 3:11-cv-510-J-32JRK
ZTE USA, Inc., a New Jersey corporation,
Defendant.
ORDER
Plaintiff, PTA-FLA, Inc. (“PTA”), filed this breach of contract case against Defendant,
ZTE USA, Inc. (“ZTE”) in the Fourth Judicial Circuit Court, in and for Duval County, Florida.
(Doc. 2). ZTE removed the action to the United States District Court for the Middle District
of Florida (Doc. 1) and then filed a Motion to Compel Arbitration1, arguing that the parties’
contract requires that their disputes be arbitrated2. (Doc. 7). PTA filed a memorandum in
opposition (Doc. 11) and ZTE filed a reply. (Doc. 14).
I. STANDARD OF REVIEW
Motions to compel arbitration are treated generally as motions to dismiss for lack of
subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). See Robert
Half Int’l, Inc. v.. Thompson, 1999 WL 138849, at *1 (N.D. Ill. Mar. 5, 1999) (citing Evans v.
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ZTE’s motion includes a motion for stay of the case and a request for an enlargement
of time to respond to PTA’s amended complaint. In an earlier Order, the Court granted
ZTE’s motion for enlargement of time to the extent that ZTE was relieved from responding
to the amended complaint until further Order. (Doc. 9).
2
PTA does not assert that ZTE has waived its right to compel arbitration by removing the
case to federal court.
Hudson Coal Co., 165 F.2d 970, 972 (3d Cir. 1948)). Such motions come in two varieties:
factual attacks and facial attacks. A factual attack challenges “the existence of subject
matter jurisdiction in fact, irrespective of the pleadings, and matters outside the pleadings,
such as testimony and affidavits, are considered.” Lawrence v. Dunbar, 919 F.2d 1525,
1529 (11th Cir. 1990). Courts have deemed a motion seeking to compel arbitration as a
factual attack as it asserts that a provision of an extrinsic document, an arbitration clause
contained within the body of a contract, deprives the court of its power to adjudicate the
plaintiff’s claims. See e.g., Reineke v. Circuit City Stores, Inc., 2004 WL 442639, at *1 (N.D.
Ill. Mar. 8, 2004) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S. Ct. 2130,
119 L. Ed. 2d 351 (1992)). While no “presumptive truthfulness” attaches to the plaintiff’s
allegations in the context of a factual challenge, Lawrence, 919 F.2d at 1529, here the
parties have only presented the allegations of the Amended Complaint, which includes the
Master Supply Agreement (“Agreement”); thus, the Court will view them both as “true” for
purposes of determining the arbitration issue.
II. FACTUAL BACKGROUND
On or about September 21, 2006, PTA entered into an Agreement with ZTE “for the
purchase of telecommunications products and related services for use in the Jacksonville,
Florida area.”
(Am. Compl. (Doc. 2)
at 3).
Paragraph 20 of the Agreement, titled
“Governing Law and Binding Arbitration,” provides, in pertinent part, that
Should any dispute, claim or controversy occur between the parties arising out
of or related to this Agreement, one party may give written notice of the
dispute to the other party. The parties shall then, in the first instance, attempt
to resolve such dispute or controversy in good faith by senior level negotiations
between the parties without attorneys present with a view to resolving the
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dispute within a period of fifteen (15) business days from the day notice of the
dispute was given (the “Resolution Period”). Such negotiations shall include
a personal meeting of at least four (4) hours duration attended by the senior
U.S. executive of each of the parties. If the parties are unable to resolve the
dispute within the Resolution Period, either party may, within ten (10) business
days after the end of the Resolution Period, initiate an arbitration proceeding
which shall be administered by the International Centre for Dispute Resolution
of the American Arbitration Association.”
(Id. at 23).
Immediately after ZTE delivered the telecommunications products to PTA, PTA
discovered that “the products had some functionality, but were not fully operational or
conforming goods.” (Id. at 3). “Throughout the deployment[,] [PTA] notified ZTE of the
numerous issues with the [p]roducts[,] and ZTE assured [PTA] that it would remedy the
defects. (Id.). PTA alleges that ZTE “not only failed to remedy the defects, but on many
occasions made attempted fixes in the middle of operating periods instead of the nighttime
maintenance window when customers would be least affected.” (Id. at 3-4).
PTA continued to notify ZTE of the product defects and ZTE continued to assure PTA
that it would remedy all defects. (Id. at 4-7). “As a result of ZTE’s failure to live up to its
promises to provide conf[o]rming goods and fulfill its obligations under the Agreement, on
April 16, 2010, [PTA] requested a meeting with the senior U.S. executive of ZTE as required
by the dispute resolution provision in the Agreement.” (Id. at 7). PTA alleges that two
meetings occurred, but that neither were in compliance with paragraph 20 of the Agreement.
(Id.). Among other alleged non-compliance issues, the first meeting was not with a senior
executive, as called for in the Agreement, “but rather with the salesperson on ZTE’s
account.” (Id.). The second meeting was with a ZTE senior executive, but “contrary to the
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language in the Agreement, this [executive] showed up with legal counsel.” (Id.).
“To date, ZTE has refused to have a meeting in compliance with the Agreement, has
refused to cure the defective products, and has refused to refund any of the $3,600,000.00
[PTA] paid.” (Id.). As a result, PTA filed a four-count complaint alleging breach of warranty,
breach of covenant of good faith and fair dealing, rescission, and fraud in the inducement.
(Id. at 8-11). ZTE then filed a Motion to Compel Arbitration and for Stay of the Case pending
arbitration. (Doc. 7).
III. DISCUSSION
PTA alleges that ZTE has failed to satisfy an essential condition precedent to
arbitration3, and therefore ZTE is not entitled to compel arbitration. (Doc. 11 at 7). PTA
argues that this Court must determine whether ZTE complied with paragraph 20's meeting
requirements. (Id. at 14). ZTE, however, argues that satisfaction of a condition precedent
to arbitration is an issue for the arbitrator to decide. (Doc. 7 at 9).
In reviewing an arbitration issue, the Supreme Court has stated that “procedural
questions which grow out of the dispute and bear on its final disposition are presumptively
not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc.,
537 U.S. 79, 84 (2002) (internal quotation marks omitted) (quoting John Wiley & Sons, Inc.
v. Livingston, 376 U.S. 543, 557 (1964) (holding that an arbitrator should decide whether the
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PTA states that “In this case, Section 20 of the Agreement, prepared by [ZTE], set forth
a clear condition precedent to arbitration, with very specific requirements: a senior level in
person meeting between each side’s top U.S. executive for a minimum of four hours, without
attorneys present, to take place within fifteen days of a party’s notice. The language of
Section 20, which was prepared by [ZTE], leaves no doubt that the required meeting is a
condition precedent.” (Doc. 11 at 10).
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first two steps of a grievance procedure were completed, where these steps were
prerequisites to arbitration)). The Court also stated that there is a presumption that “the
arbitrator should decide ‘allegation[s] of waiver, delay, or a like defense to arbitrability.’ ” Id.
(quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-5 (1983)).
Quoting the Revised Uniform Arbitration Act of 2000 (“RUAA”), the Court continued:
[an] arbitrator shall decide whether a condition precedent to arbitrability has
been fulfilled . . . [and] in the absence of an agreement to the contrary, issues
of substantive arbitrability . . . are for a court to decide and issues of
procedural arbitrability, i.e., whether prerequisites such as time limits, notice,
laches, estoppel, and other conditions precedent to an obligation to arbitrate
have been met, are for the arbitrators to decide.
Id. at 85 (emphasis added) (internal quotation marks and citations omitted). As a result, the
Court held that the interpretation of the National Association of Securities Dealers’ six-year
time limit rule for arbitration was “a matter presumptively for the arbitrator, not for the judge.”
Id.
PTA, however, argues that Howsam does not control this case. (Doc. 11 at 12). PTA
states that the Supreme Court’s citation of the RUAA in Howsam “appears to be dicta and
it does not appear that the Court intended a wholesale inclusion of all conditions precedent
as ‘procedural questions’ for the arbitrator when it addressed the time limit issue that was
within the purview of the administrative agency.” (Id. at n.6). Instead, PTA argues that
Kemiron, an Eleventh Circuit case decided seven months prior to Howsam, controls. (Id. at
14). In Kemiron, the court held that since neither party requested mediation, which was a
condition precedent to arbitration under the parties’ contract, “the arbitration provision ha[d]
not been activated.” Kemiron Atl., Inc. v. Aguakem Int’l, Inc., 290 F.3d 1287, 1291 (11th Cir.
5
2002). PTA also relies on HIM Portland, a First Circuit case, which discusses Kemiron, for
the proposition that this Court should determine whether ZTE satisfied the condition
precedent in paragraph 20. In HIM Portland, the court held that “[b]ecause neither [the
plaintiff] nor [the defendant] ever attempted to mediate the dispute, [a condition precedent
to arbitration], neither party [could] be compelled to submit to arbitration.” HIM Portland, LLC
v. DeVito Builders, Inc., 317 F.3d 41, 44 (1st Cir. 2003). PTA further notes that “the First
Circuit’s decision in HIM Portland, which was subsequent to Howsam, does not mention
Howsam in its favorable discussion of Kemiron,” thereby supporting PTA’s position that
Howsam does not control in this case. (Doc. 11 at 14).
However, in a more recent Eleventh Circuit decision, Howsam is discussed. In Klay,
the Eleventh Circuit explained that “the Supreme Court [in Howsam] laid out the respective
responsibilities of courts and arbitrators, absent an agreement to the contrary.” Klay v.
United Healthgroup, Inc., 376 F.3d 1092, 1107 (11th Cir. 2004). It continued by stating that
the Supreme Court “[a]dopt[ed] the approach embodied in the [RUAA] . . . [and] held . . .
[that] issues of procedural arbitrability, i.e., whether . . . conditions precedent to an obligation
to arbitrate have been met, are for the arbitrators to decide.” Id.
In addition, a First Circuit decision, subsequent to HIM Portland, has also followed
Howsam. See Dialysis Access Ctr, LLC v. RMS Lifeline, Inc., 638 F.3d 367, 383 (1st Cir.
2011) (“The parties disagree over whether the Arbitration Clause in fact establishes a
condition precedent to arbitration requiring that the parties engage in good faith negotiations.
Nevertheless, we do not have to resolve this disagreement because, assuming arguendo
that the Arbitration Clause establishes such a pre-condition to arbitration, Appellants have
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not rebutted the presumption that the arbitrator should decide whether the parties complied
with such a procedural pre-requisite to arbitration.”).
The instant case is distinguishable from both Kemiron and HIM Portland. In both of
those cases, neither party invoked or “perform[ed] [any of] the steps necessary, as spelled
out in the contract, to trigger arbitration.” Kemiron, 290 F.3d at 1290. In this case, certain
steps were in fact taken. Whether those steps satisfy the condition precedent in paragraph
20 of the Agreement is not for this Court to decide. Pursuant to Howsam, “an ‘arbitrator shall
decide whether a condition precedent to arbitrability has been fulfilled.’ ” Howsam, 537 U.S.
at 85; see also Klay, 376 F.3d at 1107. Therefore, an arbitrator must determine whether
ZTE satisfied the condition precedent in paragraph 20 of the Agreement.
PTA also suggests, albeit rather half-heartedly, that the Agreement’s arbitration
provision (which states that once prescribed informal settlement efforts fail, “either party may
. . . initiate an arbitration proceeding”4), is permissive, not mandatory. While this construction
has some appeal, there is ample authority supporting ZTE’s opposing position that,
notwithstanding the use of the word “may,” arbitration is mandatory. Courts interpreting
similar provisions generally read “may” as a choice between pursuing claims in arbitration
and abandoning them altogether. See, e.g., Austin v. Owens-Brockway Glass Container,
Inc., 78 F.3d 875, 879 (4th Cir. 1996) (explaining that provision that parties “may” arbitrate
once settlement efforts failed meant aggrieved party had choice to arbitrate or abandon
claim); Bonnot v. Congress of Ind. Unions, Local No. 14, 331 F.2d 355, 359-60 (8th Cir.
4
See Am. Compl. (Doc. 2) at 23.
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1964) (“The obvious purpose of the ‘may’ language is to give an aggrieved party the choice
between arbitration and the abandonment of its claim.”).
However, most cases resorting to this construction involve arbitration provisions in
collective bargaining agreements, not commercial contracts. See Austin, 78 F.3d at 321
(interpreting arbitration clause in collective bargaining agreement); Bonnot, 331 F.2d at 359
(same). But see, United States v. Bankers Ins. Co., 245 F.3d 315, 320-21 (4th Cir. 2001)
(relying on Austin, 78 F.3d 875, to support holding that parties to commercial contract would
have to arbitrate dispute notwithstanding “permissive phraseology” of their contract’s
arbitration provision). Additionally, such a reading is more convincing in a situation where
a party is attempting to resist an opponent’s attempt to arbitrate- - in that instance, “may” is
read to give either party the right to arbitrate and, once invoked, the opposing side cannot
argue that it is optional. See, e.g., Deaton Truck Line, Inc. v. Local Union 612, 314 F.2d 418,
422 (5th Cir. 1963)5 (holding contract’s use of “may” clearly gave either party the option to
require arbitration); American Italian Pasta Co. v. Austin Co., 914 F.2d 1103, 1104 (8th Cir.
1990) (rejecting efforts to stay arbitration instituted by aggrieved party once settlement
negotiations failed where contract stated unresolved disputes “may” be arbitrated); Ziegler
v. Knuck, 419 So.2d 818, 819-20 (Fla. 4th DCA. 1982) (“[T]he use of the [word ‘may’] . . .
creates in either party the right to insist upon arbitration; it creates in neither party the right
to resist arbitration insisted upon by the other.”).
5
Under Bonner v. Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981), decisions of the former
Fifth Circuit issued before October 1, 1981 are binding precedent in the Eleventh Circuit.
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The circumstance here originally seemed different. PTA was suggesting what might
be a logical reading of the phrase: as a dissatisfied party, it “may” choose to arbitrate, but
has elected to litigate instead. Nonetheless, even if the Court were to agree with this
construction (which seems to be a minority view6 and would be contrary to the maxim to
interpret ambiguities in favor of arbitration7), the right to arbitrate does belong to both parties
and even if PTA was not invoking it, ZTE now is. See Conax Florida Corp. v . Astrium Ltd.,
499 F.Supp. 2d 1287, 1298 (M.D. Fla. 2007) (staying case and compelling arbitration where
defendant initiated arbitration after plaintiff attempted to resolve dispute in court). Whether
ZTE has done so in conformity with the conditions precedent is, as explained above, a
procedural question for the arbitrator. See PTA-FLA, Inc. v. ZTE USA, Inc., Case No. 3:11cv-1605-CMC (D.S.C. Oct. 3, 2011) (rejecting PTA’s argument that the use of “may” meant
arbitration was optional, and leaving it for arbitrator to determine if ZTE’s invocation of
arbitration was timely) (cited to this Court as supplemental authority, see Doc. 19).8
6
See American Italian Pasta, 914 F.2d at 1104-06 (Gibson, J., dissenting) (questioning
whether the interpretation of arbitration provisions in collective bargaining and other labor
agreements is analogous to the interpretation of similar clauses in commercial contracts).
7
See, e.g., Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25
(1983) (“The Arbitration Act establishes that, as a matter of federal law, any doubts
concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether
the problem at hand is the construction of the contract language itself or an allegation of
waiver, delay or a like defense to arbitrability.”).
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To the extent the parties can resolve their various disputes at one time, in one forum,
they are strongly encouraged to do so.
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Accordingly, for the reasons stated, it is hereby
ORDERED:
1.
Defendant’s Motion to Compel Arbitration and For Stay of the Case (Doc. 7)
is GRANTED.
2.
The parties shall submit to arbitration as set forth in paragraph 20 of the
Master Supply Agreement.
3.
This case is STAYED pending the outcome of arbitration. The Clerk shall
administratively close the file, which may be reopened upon motion by either side.
DONE AND ORDERED at Jacksonville, Florida this 21st day of October, 2011.
a/s.
Copies:
counsel of record
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