Cahill et al v. Alternative Wines, Inc et al
ORDER granting 10 Motion to Dismiss. The Clerk of Court is directed to dismiss this case. Signed by Chief Judge Linda R Reade on 2/4/2013. (pac)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
CEDAR RAPIDS DIVISION
DAVID CAHILL and TRACEY
ALTERNATIVE WINES, INC. d/b/a
Global Wines Distribution, a North
Carolina corporation, and BRUCE A.
TABLE OF CONTENTS
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROCEDURAL HISTORY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
RELEVANT FACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUBJECT MATTER JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANALYSIS .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Dismiss or Stay Action Pursuant to the Federal Arbitration Act . . . . . . 4
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Applicable law .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Does Iowa law render the arbitration agreements
unenforceable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Do Plaintiffs’ claims fall within the arbitration
agreements? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Additional Grounds for Dismissal . . . . . . . . . . . . . . . . . . . . . . . . 12
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The matter before the court is Defendants Alternative Wines, Inc. (“Alternative
Wines”) and Bruce A. Jones’s “Motion to Dismiss or Stay Pending Arbitration”
(“Motion”) (docket no. 10).
II. PROCEDURAL HISTORY
On September 13, 2012, Plaintiffs David Cahill and Tracey Cahill (collectively,
“Plaintiffs”) filed a Petition (“Complaint”) in the District Court for Linn County, Iowa,
Case No. LACV076662. Complaint (docket no. 3). In the Complaint, Plaintiffs allege:
(1) breach of contract (Count I); (2) violation of Iowa law governing franchise agreements
pursuant to Iowa Code section 537A.10 (Count II); (3) violation of Iowa law governing
business opportunity promotions pursuant to Iowa Code chapter 551A (Count III); and (4)
fraud (Count IV). Counts I and II are against Alternative Wines, and Counts III and IV are
against Alternative Wines and Jones jointly and severally.
On October 26, 2012, Defendants Alternative Wines and Jones (collectively,
“Defendants”) removed this action on the basis of diversity jurisdiction. Notice of Removal
(docket no. 2). On November 30, 2012, Defendants filed the Motion. On January 16,
2013, Plaintiffs filed a Resistance (docket no. 13). On January 28, 2013, Defendants filed
a Reply (docket no. 16). Defendants request oral argument on the Motion. The court finds
that oral argument is unnecessary. The Motion is fully submitted and ready for decision.
Plaintiffs are citizens of Iowa and reside in Cedar Rapids, Iowa. Alternative Wines
is a North Carolina corporation with its principal place of business in Raleigh, North
Carolina. Jones is a citizen of North Carolina.
III. RELEVANT FACTS
This case centers around Defendants’ sale of wine distribution rights, certain services
and support and other consideration to Plaintiffs. In June 2011, the parties executed a
Purchase Agreement (docket no. 10-3) and a Services Agreement (docket no. 10-4).1
Plaintiffs claim that Defendants breached both agreements. The Purchase Agreement
contains an arbitration provision that states that “[i]f there is a dispute over any provision
of this Agreement, the parties agree to submit to binding arbitration.” Purchase Agreement
¶ 11.G. The Services Agreement also contains an arbitration provision that states:
7. Dispute resolution. Any disputes or claims under this
agreement or its breach shall be submitted to and resolved
exclusively by arbitration conducted in accordance with
American Arbitration Association rules. One arbitrator
appointed under such rules shall conduct arbitration.
Arbitration shall be in Raleigh, NC. Any decision in
arbitration shall be final and binding upon the parties.
The parties hereby agree to all of the above terms and have
executed this agreement by a duly authorized officer or officer
Services Agreement ¶ 7.
IV. SUBJECT MATTER JURISDICTION
The court has diversity jurisdiction over this case because complete diversity exists
among the parties and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332
(“The district courts shall have original jurisdiction of all civil actions where the matter in
controversy exceeds the sum or value of $75,000 . . . and is between . . . citizens of
different States . . . .”).
The court notes that the Purchase Agreement and Services Agreement provided
to the court are unsigned. The Purchase Agreement includes a signature line for David
Cahill and Jones, on behalf of Global Wines Distribution. Alternative Wines does business
as Global Wines Distribution. The Services Agreement includes a signature line for David
Cahill and Alternative Wines.
A. Dismiss or Stay Action Pursuant to the Federal Arbitration Act
Defendants argue that the court should enforce the arbitration agreements in the
Purchase Agreement and Services Agreement2 and dismiss or stay the action pending
arbitration. Defendants contend that the Federal Arbitration Act (“FAA”) governs the
dispute and preempts Iowa Code section 537A.10(3)(a).
Plaintiffs argue that the arbitration agreements are unenforceable under Iowa Code
section 537A.10(3)(a) and contend that the FAA does not preempt section 537A.10(3)(a)
because the FAA only preempts state laws that burden arbitration agreements specifically.
According to Plaintiffs, because section 537A.10(3)(a) applies to all franchise agreements,
including but not limited to arbitration agreements, the FAA does not preempt it.
Therefore, Plaintiffs argue that the arbitration agreements at issue in this matter are
The FAA states that “[a] written provision in any . . . 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 in equity for the revocation of any contract.” 9 U.S.C. § 2.
Thus, the FAA applies to any arbitration clause in a contract involving interstate commerce.
Id.; Perry v. Thomas, 482 U.S. 483, 489 (1987). “[T]he purpose behind [the FAA] was
to ensure judicial enforcement of privately made agreements to arbitrate.” Dean Witter
The court notes that only the arbitration provision in the Services Agreement
contains a choice of forum provision requiring arbitration in Raleigh, North Carolina and,
therefore, Iowa Code section 537A.10(3)(a) does not impact the arbitration provision in
the Purchase Agreement. Nevertheless, the court will consider the arbitration provisions
Reynolds, Inc. v. Byrd, 470 U.S. 213, 219 (1985) (discussing the legislative history of the
FAA). There is a national policy in favor of arbitration that “‘foreclose[s] state legislative
attempts to undercut the enforceability of arbitration agreements.’” Preston v. Ferrer, 552
U.S. 346, 353 (2008) (alteration in original) (quoting Southland Corp. v. Keating, 465 U.S.
1, 16 (1984)). The FAA “leaves no place for the exercise of discretion by a district court,
but instead mandates that district courts shall direct the parties to proceed to arbitration on
issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc.,
470 U.S. at 218.
When reviewing an arbitration clause, the Eighth Circuit Court of Appeals has held
that a court must consider: “(1) whether there is a valid arbitration agreement and (2)
whether the particular dispute falls within the terms of that agreement.” Faber v. Menard,
Inc., 367 F.3d 1048, 1052 (8th Cir. 2004). “Whether an arbitration agreement is valid is
a matter of state contract law.” Id. “[S]tate law may be applied ‘if that law arose to govern
issues concerning the validity, revocability, and enforceability of contracts generally.’”
Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87 (1996) (quoting Perry, 482 U.S.
at 492 n.9). “Thus, generally applicable contract defenses, such as fraud, duress, or
unconscionability, may be applied to invalidate arbitration agreements without contravening
§ 2.” Id. at 687. “[A]ny 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 a . . . defense to arbitrability.” Moses H. Cone Mem’l
Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). “In creating a substantive rule
applicable in state as well as federal courts, Congress intended to foreclose state legislative
attempts to undercut the enforceability of arbitration agreements.” Southland Corp., 465
U.S. at 16.
“A court must grant a motion to compel arbitration if a valid arbitration clause exists
which encompasses the dispute between the parties.” 3M Co. v. Amtex Sec., Inc., 542 F.3d
1193, 1198 (8th Cir. 2008). In determining whether a dispute comes within the scope of
an arbitration agreement, the court “does not reach the potential merits of any claim but
construes the clause liberally, resolving any doubts in favor of arbitration and granting the
motion ‘unless it may be said with positive assurance that the arbitration clause is not
susceptible of an interpretation that covers the asserted dispute.’” Id. at 1199 (quoting
MedCam, Inc. v. MCNC, 414 F.3d 972, 974-75 (8th Cir. 2005)). When the parties have
entered into a broad arbitration agreement, a district court must send a claim to arbitration
when the claim “touch[es] matters covered by” the arbitration agreement. Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 624 n.13 (1985).
A party that is not a signatory to an arbitration agreement may also enforce the
agreement against signatory parties under certain circumstances. First, a nonsignatory can
enforce an arbitration agreement “when ‘the relationship between the signatory and
nonsignatory defendants is sufficiently close that only by permitting the nonsignatory to
invoke arbitration may evisceration of the underlying arbitration agreement between the
signatories be avoided.’” CD Partners, LLC v. Grizzle, 424 F.3d 795, 798 (8th Cir. 2005)
(quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999)). Second,
a nonsignatory can enforce an arbitration agreement “when the signatory to a written
agreement containing an arbitration clause must rely on the terms of the written agreement
in asserting [its] claims against the nonsignatory.” Id. (alteration in original) (quoting MS
Dealer Serv. Corp., 177 F.3d at 947) (internal quotation marks omitted).
The Iowa Code provision governing franchise agreements states that “[a] provision
in a franchise agreement restricting jurisdiction to a forum outside this state is void with
respect to a claim otherwise enforceable under this section.” Iowa Code § 537A.10(3)(a).
The Supremacy Clause of the United States Constitution provides that federal law enacted
pursuant to the United States Constitution is the supreme law of the land and preempts state
law that either conflicts directly or by implication. United States Const. art. VI, cl. 2.
Pursuant to the Supremacy Clause, the FAA preempts conflicting state laws. See Doctor’s
Assocs., Inc., 517 U.S. at 688 (holding that the FAA preempts a Montana statute that
requires notice in order to enforce an arbitration clause); Perry, 482 U.S. at 484, 490-91
(holding that the FAA preempts a California law that “provides that actions for the
collection of wages may be maintained ‘without regard to the existence of any private
agreement to arbitrate’” (quoting Cal. Lab. Code Ann. § 229)); Southland Corp., 465 U.S.
at 10, 16 (holding that the FAA preempts California law that requires “judicial
consideration of claims brought under the [California Franchise Investment Law]”); OPE
Int’l LP v. Chet Morrison Contractors, Inc., 258 F.3d 443, 447 (5th Cir. 2001) (holding
that the FAA preempts a Louisiana statute that “directly conflicts with § 2 of the FAA
because the Louisiana statute conditions the enforceability of arbitration agreements on
selection of a Louisiana forum”); Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995, 998
(8th Cir. 1972) (“The plain meaning of § 2 is that federal courts are no longer to apply state
statutes and decisions which limit arbitration agreements with rules not applicable to other
The court will apply the two-step inquiry discussed above to determine whether the
arbitration agreement is enforceable.
The court assumes without deciding that the
arbitration agreements are provisions of valid contracts. First, the court will consider
whether the arbitration agreements are valid. See Faber, 367 F.3d at 1052. Second, the
court will consider whether the claims asserted in the Complaint fall within the terms of the
arbitration agreements. See id.
Does Iowa law render the arbitration agreements unenforceable?
The court notes that courts considering similar circumstances have found arbitration
agreements to be valid and enforceable. In KKW Enterprises Inc. v. Gloria Jean’s Gourmet
Coffees Franchising Corp., 184 F.3d 42 (1st Cir. 1999), the First Circuit Court of Appeals
considered whether the FAA preempts “the Rhode Island Franchise Investment Act, which
renders unenforceable ‘[a] provision in a franchise agreement restricting jurisdiction or
venue to a forum outside [Rhode Island] . . . with respect to a claim otherwise enforceable
under this Act.’” Id. at 49 (alterations in original) (quoting R.I. Gen. Laws § 19-28.1-14).
The First Circuit held that § 2 of the FAA preempts the Rhode Island statute and reversed
the district court’s decision refusing to enforce an arbitration agreement that provided a
forum outside of Rhode Island. Id. at 50. The First Circuit found that the Rhode Island
statute was not a generally applicable contract defense because it applied only to “one type
of provision, venue clauses, in one type of agreement, franchise agreements,” and
therefore, the “the statute does not apply to any contract.” Id. at 51. Thus, the First
Circuit held that, “if applied to arbitration agreements, [the Rhode Island statute is]
preempted by § 2 of the FAA.” Id.
Similarly, in M.A. Mortenson/The Meyne Co. v. Edward E. Gillen Co., No. Civ.
03-5135 PAM/RLE, 2003 WL 23024511 (D. Minn. Dec. 17, 2003), the United States
District Court for the District of Minnesota held that the FAA preempts an Illinois statute,
which states that “[a] provision contained in . . . a building and construction contract to be
performed in Illinois . . . that requires any litigation, arbitration, or dispute resolution to
take place in another state . . . is void and unenforceable.” Id. at *3 (quoting 815 Ill.
Comp. Stat. 665/10). The district court found that, because the Illinois statute “prohibits
a party from even presenting an arbitration agreement suggesting a non-Illinois forum,” it
“runs afoul to the FAA’s broad policy of allowing for the enforceability of arbitration
disputes agreed to by the parties.” Id. at *4. Thus, the district court held that the
arbitration provision was valid and enforceable. Id.
Plaintiffs rely on the Montana Supreme Court’s holding in Keystone, Inc. v. Triad
Systems Corp., 971 P.2d 1240 (Mont. 1998) in support of their argument. The court finds
that the facts in Keystone, Inc. are distinguishable from those in the underlying matter. In
Keystone, Inc., the court considered whether a Montana statute invalidated an arbitration
clause that provided for arbitration in California. Id. The Montana statute states that
“[e]very stipulation or condition in a contract by which any party thereto is restricted from
enforcing his rights under the contract by the usual proceedings in the ordinary
tribunals . . . is void.” Id. at 1243 (quoting Mont. Code Ann. § 28-2-708). Similarly,
Montana Code section 27-5-323 invalidates choice of forum provisions in arbitration
agreements. Id. at 1244. The Montana Supreme Court held that, because Montana law
“does not distinguish between forum selection clauses which are part of contracts generally
and forum selection clauses found in agreements to arbitrate,” the statute does not conflict
with the FAA and, thus, the FAA does not preempt it. Id. at 1245.
The statute at issue in the underlying matter does not apply to contracts generally.
Rather, it applies specifically to franchise agreements. Thus, the facts here are more
comparable to those in KKW Enterprises, where the court found that a state statute that only
applies to franchise agreements “is not a generally applicable contract defense,” KKW
Enters., 184 F.3d at 51, than Keystone, Inc., where the court found that the state statute
“does not distinguish between forum selection clauses which are part of contracts generally
and forum selection clauses found in agreements to arbitrate,” Keystone, Inc., 971 P.2d at
The court finds that Iowa Code section 537A.10(3)(a) is not a generally applicable
contract defense comparable to fraud, duress or unconscionability. See Doctor’s Assocs.,
Inc., 517 U.S. at 687. Rather, section 537A.10(3)(a) applies only to franchise agreements
and, therefore, violates the Supremacy Clause because it directly conflicts with § 2 the
FAA. See Southland Corp., 465 U.S. at 10 (finding that the California Supreme Court’s
interpretation of California law “directly conflicts with § 2 of the [FAA] and violates the
Supremacy Clause”); KKW Enters., 184 F.3d at 51 (holding that the FAA preempted a
similar statute); M.A. Mortenson/The Meyne Co., 2003 WL 23024511, at *4 (same).
Do Plaintiffs’ claims fall within the arbitration agreements?
The court finds that each of the claims against Alternative Wines falls within the
scope of the arbitration agreements. The arbitration provision in the Services Agreement
states that it applies to “[a]ny disputes or claims under this agreement or its breach.”
Services Agreement ¶ 7. The arbitration provision in the Purchase Agreement states that
it applies to “a dispute over any provision of this Agreement.” Purchase Agreement
¶ 11.G. The Purchase Agreement and Services Agreement are contracts between David
Cahill and Alternative Wines.
Each of the claims that Plaintiffs allege in the
Complaint—breach of contract, violation of the Iowa Code provision governing franchise
agreements, violation of the Iowa Code provision governing business opportunity
promotions and fraud—directly implicates the Services Agreement and Purchase Agreement
and, thus, clearly falls within the scope of the arbitration agreements. See Complaint ¶¶ 931; see also CD Partners, LLC, 424 F.3d at 800 (“Broadly worded arbitration
clauses . . . are generally construed to cover tort suits arising from the same set of
operative facts covered by a contract between the parties to the agreement.”).
Further, the court finds that the claims raised in Counts III and IV against Jones fall
within the scope of the arbitration agreements. As discussed above, a nonsignatory can
enforce an arbitration agreement if either: (1) the relationship between the signatory and
nonsignatory defendants is a close one; or (2) the plaintiffs’ claims against the nonsignatory
rely on and presume the existence of the arbitration agreement. CD Partners, LLC, 424
F.3d at 799. The court finds that both circumstances are present here. The relationship
between Jones, the nonsignatory, and Alternative Wines, the signatory, is close. Jones is
the President and CEO of Alternative Wines and Plaintiffs’ claims against Jones stem from
his actions in his capacity as an officer of Alternative Wines. Additionally, the claims rely
on the Purchase Agreement and Services Agreement, the very contracts that contain the
arbitration clauses. Therefore, the court finds that each claim against Alternative Wines
and Jones falls within the arbitration agreement and “touch[es] matters covered by the”
arbitration clause, making them subject to arbitration. Mitsubishi Motors Corp., 473 U.S.
at 625 n.13.
The court finds that the parties have entered into binding arbitration and, therefore,
it is appropriate to dismiss this action.3 Although the FAA provides that a court should stay
an action pending arbitration, see 9 U.S.C. § 3, several courts have held that dismissal is
appropriate when all of the issues raised in the action must be submitted to arbitration in
accordance with a valid and enforceable arbitration agreement. See Choice Hotels Int’l,
Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001)
(“Notwithstanding the terms of § 3, however, dismissal is a proper remedy when all of the
issues presented in a lawsuit are arbitrable.”); Alford v. Dean Witter Reynolds, Inc., 975
F.2d 1161, 1164 (5th Cir. 1992) (stating that § 3 of the FAA “was not intended to limit
dismissal of a case in the proper circumstances” and “[t]he weight of authority clearly
supports dismissal of the case when all of the issues raised in the district court must be
submitted to arbitration”); Rothman Furniture Stores, Inc. v. Everest Software, Inc., No.
4:10-CV-848 CDP, 2010 WL 4319707, at *2 (E.D. Mo. Oct. 22, 2010) (“[W]here all of
the issues raised in the [c]omplaint must be submitted to arbitration in accordance with a
valid and enforceable arbitration agreement, most courts agree that dismissal of the case,
rather than imposing a stay, is appropriate.”); Kalinski v. Robert W. Baird & Co., 184 F.
Supp. 2d 944, 946 (D. Neb. 2002) (“Because all of the plaintiff’s claims are subject to
arbitration, I have the discretion to dismiss this matter rather than to stay it and compel
Plaintiffs argue that, even if the court enforces the arbitration agreements, it
should order arbitration in Iowa. However, because the court finds that the arbitration
agreements are enforceable, this matter is not properly before this court and, therefore, the
court finds that it need not address it.
B. Additional Grounds for Dismissal
Defendants also argue that the court should dismiss this action pursuant to Federal
Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction and that the court should
dismiss the fraud claim pursuant to Rule 12(b)(6) for failure to state a claim upon which
relief can be granted. Because the court shall dismiss the action due to the parties’
arbitration agreements, the court finds it unnecessary to address these alternate grounds for
In light of the foregoing, Defendants’ “Motion to Dismiss or Stay Pending
Arbitration” (docket no. 10) is GRANTED. The Clerk of Court is DIRECTED to
DISMISS THIS CASE.
IT IS SO ORDERED.
DATED this 4th day of February, 2013.
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