Kawasaki Heavy Industries, Ltd et al v. Bombardier Recreational Products, Inc. et al
Filing
80
ORDER denying 28 Motion to Dismiss plaintiffs' complaint, or in the alternative, to stay plaintiffs' action pending arbitration. Signed by Chief Judge David R. Herndon on 5/5/11. (klh, )
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
KAWASAKI HEAVY INDUSTRIES, LTD.
a/k/a KAWASAKI JUKOGYO
KABUSHIKI KAISHA and KAWASAKI
MOTORS MANUFACTURING CORP.,
U.S.A.,
Plaintiffs,
Case No. 3:10-cv-00641-DRH-DGW
v.
BOMBARDIER RECREATIONAL
PRODUCTS, INC., BRP U.S., INC.,
BANK OF MONTREAL (in the capacity
as administrative agent), HARRY
MARCUS, and ROBERT GOETHALS
Defendants.
MEMORANDUM and ORDER
HERNDON, District Judge:
I. Introduction
Presently before the Court is defendants Bombardier Recreational
Products, Inc. (“BRP”) and BRP U.S., Inc.’s (“BRP U.S.”) (collectively referred to as
“defendants” or “the BRP parties”) motion to dismiss, or in the alternative, to stay
plaintiffs’ action pending arbitration and supporting memorandum (Doc. 28).
Plaintiffs Kawasaki Heavy Industries, Ltd.’s (“KHI”) and Kawasaki Motors
Manufacturing Corp., U.S.A. (“KMM”) (collectively referred to as “plaintiffs” or
“Kawasaki”) filed an opposition to defendants’ motion to dismiss, or in the
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alternative, to stay plaintiffs’ action pending arbitration (Doc. 48). For the reasons
stated below, the Court denies defendants’ motions to dismiss, or in the alternative,
to stay plaintiffs’ action pending arbitration.
II. Background
A.
The BRP/Kawasaki Litigation
This dispute arises out of several cases filed between February 2006 and
April 2007 between Kawasaki and the BRP Parties involving numerous allegations
of patent infringement (Doc. 2, ¶ 1). The relevant cases are: Bombardier Recreational
Products, Inc. and BRP-US, Inc. v. Kawasaki Heavy Industries, Ltd. et al., Case No.
06-cv-JA-JGG, filed in the Middle District of Florida (the “Florida Litigation”);
Kawasaki Heavy Industries, Ltd. v. Bombardier Recreational Products, Inc. and
BRP-US, Inc., Case No. 06-cv-222-DF, filed in the Eastern District of Texas (the
“Texarkana Litigation”); and Bombardier Recreational Products, Inc. and BRP-US,
Inc. v. Kawasaki Heavy Industries, Ltd. et al., Case No. 07-cv-156-LED, also filed
in the Eastern District of Texas (Id. at ¶¶ 12, 14-15). In relation to the Florida
Litigation, Kawasaki also requested reexamination of three BRP patents from the
United States Patent and Trademark Office, concerning Patent Nos. 6,336,833
(Control No. 90/008222), 6,405,669 (Control No. 95/000179), and 6,428,371
(Control No. 95/000163) (Id. at ¶ 13).
B.
The BRP/Kawasaki Settlement Agreement
In September 2007, Kawasaki and the BRP parties reached an
agreement in principle to settle the disputes alleged in the various lawsuits (Id. at ¶
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16). This settlement agreement contained an alternative dispute resolution provision
in which the parties mutually agreed to arbitrate “any claim, dispute or controversy
between the parties arising out of or relating to [the] Settlement Agreement.” (Doc.
28, Ex. A, pp. 15-16.).1 Additionally, pursuant to the settlement agreement, the BRP
parties were to obtain an agreement from the Bank of Montreal (“Bank of Montreal”
or “the Bank”) to subordinate certain security interests the Bank possessed in the
BRP parties’ patent portfolio on behalf of several secured lenders to the BRP parties
(Doc. 2, ¶¶ 17-18). This subordination agreement would prevent the Bank in the
event of a foreclosure from taking the patents free of a covenant not to sue which the
BRP parties had granted Kawasaki (Doc. 48, p. 2).
Prior to executing the settlement agreement, Kawasaki requested
confirmation from the BRP parties that the Bank was willing to subordinate its
security interest (Doc. 2, ¶ 18). In response to this request, counsel for the BRP
1
The arbitration clause reads as follows:
Any claim , dispute or controversy between the parties arising out of or relating to this Settlem ent
Agreement shall be resolved by first a personal m eeting between representatives of each party to
the m atter, with such representatives having the power to resolve the matter on behalf of their
com pany. Should a resolution fail to be reached through a personal meeting or should either party
refuse or fail to reasonably attend a personal m eeting, the party asserting such dispute shall
provide notice to the other party of its intention to subm it the dispute to non-binding m ediation,
each party agrees to subm it the dispute to non-binding mediation to be held in Dallas, Texas. Each
party will bear its own costs. There will be no discovery in such proceeding other than a specific
factual identification of the alleged breach and the response thereto. Should a resolution fail to be
reached through non-binding m ediation or should either party refuse or fail to reasonably
participate in the non-binding mediation, each party agrees to subm it the dispute to binding
arbitration to be held in Dallas, Texas. Each party will bear its own costs. The arbitration will be
conducted in accordance with the prevailing arbitration rules of the Am erican Arbitration
Association for the Com plex Com m ercial Litigation or such other rules as the parties m ay agree.
The arbitrator shall render a reasoned award, setting forth findings of fact and conclusions of law
upon which the award is based. The award shall be final and binding upon both parties.
Judgm ent upon the award m ay be entered in any court having jurisdiction thereof.
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parties, defendants Robert Goethals and Harry Marcus, sent an email stating that
“BRP has just received word that the Bank of Montreal will agree to subordinate the
security interests.” (Id. at ¶ 19). In reliance on this representation, Kawasaki and the
BRP parties finalized the settlement agreement, which became effective on March 31,
2008 (Id. at ¶ 20; see also Doc. 28, Ex. A, pp. 13, 18). Pursuant to the settlement
agreement, the parties timely dismissed their respective patent lawsuits (Doc. 2, ¶
22). Shortly thereafter, counsel to the BRP parties informed Kawasaki “that it is
taking longer than expected to work with the Bank to prepare and execute the
subordination documents” and that “it will take an additional 15 days beyond the 10
day period provided in the settlement agreement.” (Id. at ¶ 23). Kawasaki expressed
concern that the BRP parties would not fulfill their obligations under the settlement
agreement, to which counsel for the BRP Parties replied:
“[t]he unexpected delay we are encountering with the subordination
agreement results from having to work with the bank's attorneys. We
discussed the need for the subordination agreement with the bank
before finalizing the settlement agreement and we don't expect any
problems with obtaining the subordination agreement. However, we
cannot dictate the timeframe for finalizing it since we are dealing with
another party.”
(Id. at ¶ 24). Shortly after this statement, Kawasaki fully performed its obligations
under the settlement agreement (Id.).
On May 14, 2008, the BRP parties informed Kawasaki that they were not
going to provide the required subordination agreement from the Bank (Id. at ¶ 25).
In response, Kawasaki sought to vacate the stipulated dismissal of the Texarkana
Litigation on April 1, 2009 (Case No. 5:06-cv-222, Doc. 28, Ex. C). Both parties
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participated in briefing before the United States District Court for the Eastern
District of Texas (Doc. 48, pp. 5-6), which ultimately denied Kawasaki’s motion (Doc.
28, Ex. D); this decision was upheld on appeal.
Kawasaki subsequently filed suit in this Court on August 23, 2010,
against the BRP parties, as well as the Bank, Goethals, and Marcus (these three
parties being hereafter collectively referred to as the “non-signatory parties” or “nonsignatories”), requesting specific performance of the BRP parties’ obligations under
the settlement agreement, or in the alternative, asserting against varying defendants
claims for breach of contract, fraud, fraud in the inducement, negligent
misrepresentation, negligence, breach of a third party beneficiary contract, and
tortious interference, and seeking damages accordingly (See generally Doc. 2).2
Against the BRP parties specifically, Kawasaki alleged breach of the settlement
agreement, fraud, fraud in the inducement, negligent misrepresentation, and
negligence (Id.).
In response, the BRP parties filed the motion presently before the Court.
III. Discussion
The defendants contend that this Court should dismiss Kawasaki’s
claims or, in the alternative, to stay those claims pending arbitration pursuant to the
2
Specifically, plaintiffs seek specific perform ance of the settlem ent agreem ent in Count I. In
the alternative, plaintiffs allege a claim for the breach of the settlem ent agreem ent in Count II. In
Counts III, IV, V and VI, plaintiffs assert claim s for fraud, fraud in the inducem ent, negligent
m isrepresentation, negligent m isrepresentation and negligence against the BRP parties, Marcus and
Geothals. Further, in Counts VII and VIII, plaintiffs allege claim s for breach of a third party
beneficiary contract and tortious interference against the Bank of Montreal.
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Federal Arbitration Act (“FAA”). Specifically, the BRP parties argue that plaintiffs’
claims arise out of and relate to the settlement agreement between plaintiffs and
themselves, thus, these claims are subject to the arbitration clause contained in the
settlement agreement. In response, Kawasaki argues that (i) the BRP parties have
waived any claim to arbitration they may have; (ii) the Bank and other non-signatory
parties do not have the right to participate in the arbitration; and (iii) the claims
against the non-signatory parties are not affected by the instant breach of contract
claim. Based on the following, the Court agrees with plaintiffs.
A.
Jurisdiction
The FAA does not by itself confer subject matter jurisdiction over any
dispute; rather, “there must be diversity of citizenship or some other independent
basis for federal jurisdiction” to address a dispute relating to an arbitration
provision. America’s Moneyline, Inc. v. Coleman, 360 F.3d 782, 784-85 (7th Cir.
2004) (internal quotation and citation omitted). As such, this Court may issue “an
order compelling arbitration only when the federal district court would have
jurisdiction over a suit on the underlying dispute.” Id. at 785 (emphasis omitted).
The BRP parties are seeking to arbitrate the plaintiffs’ claims relating to breach of the
settlement agreement; as a state law contract matter, the Court must determine
whether there is complete diversity and whether the requisite jurisdictional amount
has been met in order to assert jurisdiction. See 28 U.S.C. § 1332.
In order to establish diversity in its complaint, the plaintiffs allege that:
(1) KHI is a Japanese corporation with a principal place of business in Japan; (2)
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KMM is a Nebraska corporation with its principal place of business in Nebraska; (3)
BRP-CA is a Canadian corporation with its principal place of business in Canada; (4)
BRP-US is a Delaware corporation with its principal place of business in Wisconsin;
(5) the Bank is a Canadian corporation with its principal place of business in
Canada; and (6) Robert Goethals and Harry Marcus are residents of the state of New
York (Doc. 2, ¶¶ 5-11). While the parties dispute whether or not the non-signatories
are ultimately subject to the arbitration provision, the Court finds that there is
complete diversity of citizenship for purpose of evaluating jurisdiction.
As to the amount in controversy, “[i]n the context of actions to compel
arbitration, . . . in order to ascertain whether the jurisdictional amount for the
diversity statute has been met, the appropriate focus is the stakes of the underlying
arbitration dispute.” America’s Moneyline, 360 F.3d at 786. “In deciding whether a
claim meets the minimum amount in controversy, the plaintiff’s evaluation of the
stakes must be respected.” Barbers, Hairstyling for Men & Women, Inc. v. Bishop,
132 F.3d 1203, 1205 (7th Cir. 1997). So long as it is not “legally certain that the
stakes of the arbitration would be $75,000 or less . . . , then the claim satisfies the
jurisdictional minimum.” Id. The plaintiffs have alleged that the property rights at
issue in the underlying dispute which the BRP parties are seeking to arbitrate exceed
$75,000 in value.
Finding the amount in controversy requirement to have been met, the
Court now considers the merits of the motion presently before it. When a party seeks
to invoke an arbitration clause, the proper procedure is to stay the proceedings
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rather than dismiss them outright. See Cont’l Cas. Co. v. Am. Nat’l Ins. Co., 417
F.3d 727, 732 n. 7 (7th Cir. 2002). Accordingly, the Court will review the motion to
determine whether arbitration is appropriate.
B.
Waiver of Rights of Arbitration
The Federal Arbitration Act (“FAA”) was originally enacted “... to reverse
the longstanding judicial hostility to arbitration agreements that had existed at
English common law and had been adopted by American courts, and to place
arbitration agreements upon the same footing as other contracts.”
Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). “Its primary substantive
provision states that ‘[a] written provision in any maritime transaction or contract
evidencing a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction ... shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or equity for the revocation
of any contract.’” Id. at 24-25 (quoting 9 U.S.C. § 2). Section 3 of the FAA provides
for stays of proceedings where the issue therein is referable to arbitration, and § 4
provides for the court’s entering an order compelling arbitration where a party has
failed to arbitrate under the agreement. 9 U.S.C. § § 3, 4.
“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.” Moses H
Cone Memorial Hosp. v. Mecury Const. Corp., 460 U.S. 1, 24-25 (1983). However,
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this policy is not absolute, and courts may decline to enforce an arbitration provision
for any number of reasons. St. Mary’s Med. Ctr. of Evansville, Inc. v. Disco
Aluminum, 969 F.2d 585, 587 (7th Cir. 1992). “[F]ederal courts have consistently
held that among those grounds is waiver of the right to arbitrate.” Id. The contractual
right to arbitrate may be expressly or implicitly waived. Cabinetree of Wisc., Inc. v.
Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390-91 (7th Cir. 1995). Absent an express
waiver of the right to arbitrate, the Court must “determine whether based on all the
circumstances, the party against whom the waiver is to be enforced has acted
inconsistently with the right to arbitrate.” Sharif v. Wellness Int’l Network, Ltd., 376
F.3d 720, 726 (7th Cir. 2004) (internal citation omitted). “Although a variety of
factors may be considered, diligence or a lack thereof should weigh heavily in the
court’s determination of whether a party implicitly waived its right to arbitrate.”
Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557, 562 (7th Cir. 2008).
Although the case at bar which the BRP parties are seeking to dismiss
or stay was only initiated approximately six months ago, the dispute between the BRP
parties and Kawasaki over the settlement agreement and its subordination
requirement has been going on for nearly two years. See St. Mary’s Med. Ctr., 969
F.2d at 589 (finding that a demand for arbitration filed 10 months after being sued,
when the party seeking arbitration had otherwise been participating in the litigation
for two years, was inconsistent with an intent to arbitrate). The BRP parties claim
that they did not yet deem it necessary to abandon the parties’ efforts to resolve the
dispute without outside intervention (Doc. 53, p 6). However, counsel for the BRP
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parties raised the issue of the arbitration provision two years before the filing of the
present action (Doc. 28, Ex. B), without further pursuing the matter.
The record reveals that the BRP parties submitted briefs before the
Eastern District of Texas when Kawasaki sought to vacate the stipulated dismissal
of the Texarkana Litigation; they also participated in Kawasaki’s appeal of the order
denying that motion. Also during that time, the BRP parties participated in the
Federal Circuit’s mediation program. The BRP parties did not move to stay or
dismiss the litigation or move to strike plaintiffs’ motion. Although the BRP parties
note that their involvement in the renewed Texarkana Litigation was limited to a
challenge to subject matter jurisdiction, this does not override the two year delay in
asserting their right to arbitrate. See St. Mary’s Med. Ctr., 969 F.2d at 591 (noting
that a delay in demanding arbitration caused the opposing party to endure two years
of litigation expenses that could otherwise have been avoided). Simply put, the BRP
parties failed to seek an order to arbitrate or stay at the first opportunity. See
Cabinetree of Wisc., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 888, 390-91 (7th Cir.
1995)(party in breach moved for stay of litigation after first electing to remove the
originally filed state court action to Federal court. The Seventh Circuit found that the
election of the judicial process and participation constituted a presumptive waiver
of the right to arbitrate.). The Court finds that the BRP parties have acted
inconsistently with the intent to arbitrate and thus implicitly waived their right to
arbitrate.
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C.
Non-Signatories May Not Be Compelled to Arbitrate
As a preliminary observation, “arbitration is a matter of contract and a
party cannot be required to submit to arbitration any dispute which he has not
agreed to arbitrate.” Grundstad v. Ritt, 106 F.3d 201, 204 (7th Cir. 1997) (quoting
AT&T Tech., Inc. v. Comm. Workers of Am., 475 U.S. 643, 648 (1986)) (internal
citations omitted). Unless ordinary rules of contract and agency provide a basis for
requiring non-signatories to arbitrate, a non-signatory is not bound by an arbitration
agreement between other parties. Zurich American Ins. Co. v. Watts Indus., Inc., 417
F.3d 682, 687 (7th Cir. 2005) (internal citations omitted). However, there are
exceptions to the rule. Because arbitration is a creature of contract law, there are
certain principles of contract law that federal courts have applied in compelling
arbitration even when there is not a written arbitration agreement between the
relevant parties. There are five doctrines under which a non-signatory can be bound
by an arbitration agreement entered into by others: (1) assumption; (2) agency; (3)
estoppel; (4) veil piercing; and (5) incorporation by reference. Id. at 687 (citing
Fyrnetics (Hong Kong) Ltd. v. Quantum Group, Inc., 293 F.3d 1023, 1029 (7th Cir.
2009)).
Here, the BRP parties argue that the claims against non-signatories
Marcus, Goethals and the Bank of Montreal are so intertwined with the settlement
agreement such that the non-signatories should be able to enforce the settlement
agreement. Kawasaki asserts that the non-signatory parties cannot be compelled to
arbitrate and that its claims against the non-signatory parties are not affected by and
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would therefore not be resolved by resolution of the breach of contract claim against
the BRP parties.
As non-signatories, defendants Goethals, Marcus, and the Bank are not
bound by the settlement agreement. The BRP Parties have not articulated any theory
under which the non-signatory parties can be bound, and the facts alleged do not
support one. The BRP Parties argue that Kawasaki is attempting to avoid arbitration
by adding nons-ignatory parties as defendants. They assert that the settlement
agreement and its arbitration provision apply to the nonsignatory parties, arguing
that plaintiffs’ claims against the nonsignatory parties are so intertwined with the
settlement agreement that the nonsignatory parties should be able to enforce the
arbitration provision against the plaintiffs. The Court does not agree.
The claims against the BRP parties are not substantially the same as the
claims against the non-signatory parties as any arbitration against the BRP parties
would not resolve the claims against the non-signatories. Based on the allegations,
plaintiffs would be unable to seek relief from the non-signatories in arbitration. The
claims against Marcus and Goethals are based on their representations to plaintiffs;
not breach of contract.
Plaintiffs contend that these representations are
independently actionable if the BRP parties failed to obtain an agreement with the
Bank as the attorneys defendants represented to plaintiffs that it had been done.
Furthermore, plaintiffs claims against the Bank are premised on the possibility that
an agreement between the BRP parties and the Bank existed for the benefit of
plaintiffs and that agreement was breached. This theory of liability against the Bank
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is premised on a completely different agreement (one that would have required the
Bank, upon execution of the settlement agreement, to enter into a subordination
agreement concerning plaintiffs’ rights) than the settlement agreement which
contains the arbitration clause. If there was a subordination agreement as alleged,
that dispute does not entail the settlement agreement. Accordingly, the arbitration
clause in the settlement agreement does not apply to the non-signatory parties and
cannot be enforce against them.
IV. Conclusion
For the foregoing reasons, the Court DENIES the BRP parties’ motion
to dismiss plaintiff’s complaint, or in the alternative, to stay plaintiffs’ action pending
arbitration (Doc. 28).
IT IS SO ORDERED.
Signed this 5th day of May, 2011.
Digitally signed by
David R. Herndon
Date: 2011.05.05
13:32:01 -05'00'
Chief Judge
United States District Court
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