Powers Distrubuting Company, Inc. v. Grenzebach Corporation
Filing
9
OPINION AND ORDER DENYING 3 Defendant's MOTION to Dismiss. Signed by District Judge Terrence G. Berg. (AChu)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
POWERS DISTRIBUTING COMPANY,
INC.
Plaintiff,
Case No. 16-12740
Hon. Terrence G. Berg
v.
GRENZEBACH CORPORATION,
Defendant.
/
OPINION AND ORDER DENYING DEFENDANT’S
MOTION TO DISMISS (DKT. 3)
I.
INTRODUCTION
Defendant Grenzebach Corporation moves to dismiss this case for lack of subject
matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1) on the ground
that the parties’ dispute must be arbitrated. The Court finds that Plaintiff’s claims
relate to contracts with arbitration provisions. But because Plaintiff asked at oral
argument for permission to amend its complaint, Defendant’s motion is DENIED
WITHOUT PREJUDICE.
II. FACTUAL AND PROCEDURAL HISTORY
This is a breach of contract case. Plaintiff is a beer distributor. Dkt. 5, Pg. ID 132.
Defendant is a company that provides automated systems for businesses. Id. In
September of 2013, Plaintiff purchased an automated system for locating and
retrieving products in a distribution center (a “case-picking system”) from Material
Handling Technologies (MHT). Id. at Pg. ID 133. The contract for the purchase of this
system did not contain an arbitration provision. Id. at Pg. ID 135. Six months later,
MHT informed Plaintiff that Defendant had acquired MHT’s entire case-picking line
of business and that Plaintiff should send future payments for the system to
Defendant, not MHT. Id. In June of 2014, Defendant offered Plaintiff an update to
the system that would give the system new capabilities. Id. at Pg. IDs 135-36.
Defendant’s offer was eventually memorialized in two purchase orders, one for a
software upgrade and one for a hardware upgrade. Dkt. 5, Exs. C and D. Both
purchase orders contained the following arbitration provision:
Id.; see also Dkt. 3, Exs. 1 and 2. Plaintiff accepted Defendant’s offer. Dkt. 3, Ex. 4.
Installation of the upgrades took six months. Dkt. 5, Pg. ID 137. When the
installation was finally complete, Plaintiff tested the upgrades. Id. The results were
subpar. Id. The system passed only half of the tests, and much of it had to be reverted
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to the original version because of system failures. Id. Plaintiff only approved the
system for the tests that it passed, but deemed the upgrade unworkable in its
entirety. Id. Plaintiff and Defendant then agreed that Plaintiff would have the option
to purchase the next upgrade for $25,000, and that, if Plaintiff chose to purchase the
upgrade, Defendant would install the upgrade no later than December of 2016. Id.
That upgrade never came. In November of 2015, Defendant fired the only
technician who could support the system. Dkt. 5, Pg. ID 137. Two months later,
Defendant informed Plaintiff that instead of providing the promised upgrade to the
existing system, Defendant planned to rewrite the entire system. Id. at Pg. ID 138.
The parties exchanged emails discussing how the rewrite would affect the agreement
the parties reached after the first upgrade failed testing. Id. at Pg. IDs 138-40.
Defendant then emailed Plaintiff with the news that Defendant had decided not to
rewrite the system after all, and that it was cutting support for the original system
from 24-hours-a-day to weekdays from 8:00 a.m. to 5:00 p.m. Id. at Pg. ID 140.
At that point Plaintiff still had the original system it purchased from MHT, but
needed to support the system itself because Defendant no longer employed anyone
who could provide support. Dkt. 5, Pg. ID 140. On June 16, 2016, Plaintiff sued
Defendant in Oakland County Circuit Court, alleging Breach of Contract, Breach of
Express
and
Implied
Warranties,
Innocent
Misrepresentation,
Negligent
Misrepresentation, Silent Fraud, and Indemnification. Dkt. 1. Defendant removed
the case to this Court, id., and now seeks dismissal based on the arbitration clauses
in the purchase orders. Dkt. 3.
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III. ANALYSIS
A. Standard of Review
Courts in the Sixth Circuit are split on whether a motion to dismiss based on an
arbitration agreement should be brought under Federal Rule of Civil Procedure
12(b)(1) (lack of subject matter jurisdiction) or Rule 12(b)(6) (failure to state a claim).
Some courts have found that such motions should be raised under Rule 12(b)(1).1
Others have concluded that they arise under Rule 12(b)(6).2
Whether to proceed under one rule or the other turns on concerns about, on one
hand, whether evidence outside the pleadings is being used and whether the case
should be dismissed with prejudice under Rule 12(b)(6), and, on the other, whether
the term “jurisdiction” (as in “lack of subject matter jurisdiction”) is being used with
precision under Rule 12(b)(1). When analyzing a factual attack to subject matter
jurisdiction under Rule 12(b)(1), a court may consider any evidence properly before
it. See Morrison v. Circuit City Stores, Inc., 70 F. Supp. 2d 815, 819 (S.D. Ohio 1999).
See Mann v. Equifax Info. Servs., LLC, 2013 WL 3814257, at *2 (E.D. Mich. 2013)
(applying a Rule 12(b)(1) analysis to a motion seeking dismissal and an order
compelling arbitration); Multiband Corp. v. Block, 2012 WL 1843261, at *5 (E.D.
Mich., May 21, 2012) (explaining that, substantively, a motion to compel arbitration
is a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction);
Dalton v. Jefferson Smurfit Corp., 979 F. Supp. 1187, 1192 (S.D. Ohio 1997) (“a motion
to dismiss premised upon the argument that a plaintiff's claim must be submitted to
arbitration is properly analyzed under Rule 12(b)(1)”)
2 See High v. Capital Senior Living Props. 2—e Heatherwood, Inc., 594 F. Supp. 2d
789, 795 (E.D. Mich. 2008) (noting that “a motion to dismiss grounded on an
arbitration clause is more properly brought under Rule 12(b)(6)”); Moore v. Ferrellgas,
533 F. Supp. 2d 740, 744 (W.D. Mich. 2008) (noting that the motion “would more
properly have been brought under Rule 12(b)(6)”).
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The typical result of a Rule 12(b)(1) dismissal is that no obstacle prevents a plaintiff
from litigating her claims in a different forum. See Dalton, 979 F. Supp. at 1192. A
court dismissing a case because of an arbitration agreement “does not prevent a
plaintiff from litigating the merits of his or her claim . . . [but] merely transfers the
forum in which the litigation on the merits will occur.” Id. These aspects of how Rule
12(b)(1) functions in the arbitration context suggest that a motion to dismiss based
on an arbitration agreement falls within Rule 12(b)(1) rather than within Rule
12(b)(6).
But under the Federal Arbitration Act, a court retains authority to stay a case
pending arbitration and then afterward enter judgment on the award. See 9 U.S.C.
§§ 3, 9. So, technically, when a court compels arbitration it still retains jurisdiction
over the dispute. And the Sixth Circuit has cautioned courts to be more precise when
analyzing challenges phrased as attacks on “jurisdiction.” See Primax Recoveries, Inc.
v. Gunter, 433 F.3d 515, 518-19 (6th Cir. 2006). This aspect of how Rule 12(b)(1)
functions in the arbitration context—dismissing a case for “lack of subject matter
jurisdiction” when the court in fact has and retains jurisdiction—suggests that a
motion to dismiss based on an arbitration agreement falls within Rule 12(b)(6) rather
than within Rule 12(b)(1).
Here, Defendant brings its motion under Rule 12(b)(1). Dkt. 3. Plaintiff does not
argue that the Court should analyze the motion under Rule 12(b)(6), and instead
responds within the confines of Rule 12(b)(1). Dkt. 5, Pg. IDs 141-150. Because the
choice of Rules does not affect the outcome of the Court’s analysis, and because the
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parties address the question similarly, the Court will treat the motion as one to
dismiss under Rule 12(b)(1).
A Rule 12(b)(1) motion attacks a complaint either facially or factually. United
States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994). A facial attack challenges the
sufficiency of the complaint itself, which requires a court to take as true all material
allegations in the complaint and to construe those allegations in the light most
favorable to the plaintiff. Id. at 598. A factual attack, however, challenges the factual
existence of subject matter jurisdiction. A court analyzing a factual attack therefore
need not accept as true the complaint’s factual allegations, but instead must weigh
any evidence properly before it. See Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d
320, 325 (6th Cir. 1990); Rogers v. Stratton Indus., Inc., 798 F.2d 913, 918
(6th Cir. 1986). Defendant argues that arbitration is the appropriate forum in which
to settle this dispute. The complaint itself stands for Plaintiff’s allegation that a court
of law is the appropriate forum in which to settle this dispute. Thus Defendant’s
motion here is a factual attack questioning the factual existence of subject matter
jurisdiction.
B. Discussion
“A written agreement to arbitrate disputes arising out of a transaction in
interstate commerce ‘shall be valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of any contract.’” Javitch v.
First Union Sec., Inc., 315 F.3d 619, 624 (6th Cir. 2003) (quoting 9 U.S.C. § 2). The
Federal Arbitration Act “is at bottom a policy guaranteeing the enforcement of private
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contractual agreements” arising from a “liberal federal policy favoring arbitration
agreements.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,
625 (1985) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1
(1983)). Accordingly, “when asked by a party to compel arbitration under a contract,
a federal court must determine whether the parties have agreed to arbitrate the
dispute at issue.” Great Earth Cos., Inc. v. Simons, 288 F.3d 878, 889 (6th Cir. 2002).
When making this determination, there are two important considerations: the
language in the arbitration agreement and the claims of the lawsuit. Here, both
parties focus too much on the former and not enough on the latter.
Defendant argues that the language “any dispute, controversy or claim arising out
of or in relation to or in connection with this agreement” mandates that any dispute
between the parties must go to arbitration. Dkt. 3, Pg. ID 55. Plaintiff responds that
the arbitration provisions in the purchase orders were not intended to and should not
retroactively apply to the agreement between it and MHT. Dkt. 5, Pg. IDs 141-46.
Both parties agree that the Court must examine “which agreement determines the
scope of the contested obligations.” Nestle Waters N. Am., Inc. v. Bollman,
505 F.3d 498, 504 (6th Cir. 2007). Defendant touts the upgrade agreements (with the
arbitration clauses) and Plaintiff trumpets its agreement with MHT (without such
clauses), but neither party connects those agreements to the specific obligations at
issue in each cause of action.
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Plaintiff has asserted six causes of action:
Breach of Contract;
Breach of Express and Implied Warranties;
Innocent Misrepresentation;
Negligent Misrepresentation;
Silent Fraud; and
Indemnification.
Dkt. 1. In analyzing what obligations each claim triggers and from which agreement
those obligations stem, it is helpful to “ask if [the] action could be maintained without
reference to the contract or relationship at issue.” Fazio v. Lehman Bros., Inc., 340
F.3d 386, 395 (6th Cir. 2003). As noted by the Nestle court, this is a broader test than
the test applicable when there are multiple contracts, 505 F.3d 498, 504, but the
Court finds the test helpful in reaching an answer under the narrower test that asks
which agreement determines the scope of the contested obligations. Thus the Court
will proceed seriatim through each cause of action and will inquire whether it can be
maintained without reference to the upgrade agreements (the agreements with the
arbitration provisions). If the answer is yes, that cause of action will not be subject to
arbitration. If the answer is no, that cause of action must go to arbitration.
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1. Breach of Contract
The relevant language in the Complaint is:
Dkt. 1, Pg. ID 23. This cause of action cannot be maintained without reference to the
upgrade agreements. In defining the contract Plaintiff claims Defendant breached,
Plaintiff relies explicitly on the purchase orders. Plaintiff does not treat the contract
between it and MHT as a separate contract, the obligations of which Defendant
assumed and breached. In fact, the allegations in this cause of action and the
allegations in the paragraphs Plaintiff incorporates by reference both focus entirely
on the case-picking system’s shortcomings after Defendant installed the upgrades.
Plaintiff nowhere alleges that the original system malfunctioned, and nowhere
alleges that Defendant’s conduct breached specific provisions of the contract between
MHT and Plaintiff. Thus the upgrade agreements determine the scope of the
obligations contested by this cause of action, and this cause of action must go to
arbitration.
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2. Breach of Express and Implied Warranties
The relevant language is:
Dkt. 1, Pg. IDs 24-25. This cause of action cannot be maintained without reference to
the upgrade agreements. Plaintiff alleges only that Defendant expressly warranted
both the case-picking system and its upgrades. Plaintiff does not allege that MHT
warranted the original system and that Defendant assumed responsibility for that
warranty. And Plaintiff mentions only the system and upgrades supplied by
Defendant, not the original system supplied by MHT. Here, again, the upgrade
agreements determine the scope of the obligations contested by this cause of action,
and this cause of action must go to arbitration.
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3. Innocent Misrepresentation
The relevant language is:
Dkt. 1, Pg. ID 26.
This cause of action also cannot be maintained without reference to the upgrade
agreements. Plaintiff references only representations made by Defendant, not
representations made by MHT that Defendant then assumed. Further, Plaintiff
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references the parties’ agreements (the upgrade agreements), but nowhere references
its agreement with MHT. The scope of the obligations contested by this cause of action
are defined by the upgrade agreements, and those agreements contain arbitration
clauses.
4. Negligent Misrepresentation
The relevant language is:
Dkt. 1, Pg. ID 27-28.
This cause of action, like the others, cannot be maintained without reference to
the upgrade agreements. Again, Plaintiff references only representations made by
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Defendant, not representations made by MHT that Defendant then assumed.
Plaintiff alleges that Defendant relied upon its own particularized knowledge, and
that it led Plaintiff to believe that the system would be improved. This demonstrates
that the cause of action stems from allegations regarding the upgrades Defendant
provided, not the initial system MHT provided. This cause of action is subject to
arbitration because the obligations contested by this action arise under the upgrade
agreements.
5. Silent Fraud
The relevant language is:
Dkt. 1, Pg. ID. 29.
The incompatibility of which Plaintiff complains exists between the systems,
equipment, and software that Plaintiff purchased from Defendant, not from MHT.
And the disclosures Plaintiff alleges that Defendant failed to make relate to upgrades
and support. Nowhere does Plaintiff allege that Defendant breached a duty to disclose
that belonged originally to MHT and was transferred to Defendant. Thus the upgrade
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agreements determine the scope of the obligations contested by this cause of action,
and this cause of action must go to arbitration.
6. Indemnification
The relevant language is:
Dkt. 1, Pg. ID. 30.
This cause of action, by referring to “the contract” between Defendant and
Plaintiff, also refers to the upgrade agreements. Plaintiff alleges only that Defendant
expressly agreed to indemnify Plaintiff, not that MHT agreed to indemnify Plaintiff
and Defendant assumed that obligation. Thus the upgrade agreements determine the
scope of the obligations contested by this cause of action, and this cause of action must
go to arbitration.
It is true that the only agreement containing an indemnification provision is the
original agreement between MHT and Plaintiff, not either upgrade agreement
between Defendant and Plaintiff. This suggests that Plaintiff is conflating MHT’s
obligations under its original contract with Defendant’s obligations under the
upgrade agreements. As it stands, the Complaint alleges that Defendant expressly
agreed to indemnify Plaintiff; this is not correct, the obligation to indemnify applied
to MHT under the original contract. But the Court will not construe Plaintiff’s claim
that Defendant agreed to indemnify Plaintiff to mean that MHT agreed to indemnify
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Plaintiff. If Plaintiff meant to say that MHT agreed to indemnify Plaintiff, it should
have said so. Likewise for the other causes of action—if Plaintiff meant to allege that
an obligation at issue in one of its causes of action began as MHT’s obligation and
transferred to Defendant, Plaintiff should have said so.
IV. CONCLUSION
The claims as drafted are subject to arbitration. But because at oral argument
Plaintiff asked to amend its complaint, Defendant’s Motion to Dismiss is DENIED
WITHOUT PREJUDICE. The Court does not consider the amended complaint filed
on October 18, 2016 as the amendment Plaintiff requested; there Plaintiff submitted
exhibits and citations that previously were redacted, and did not change the
substance of its allegations. Plaintiff may file an Amended Complaint within 14 days
of the date of this Order, and Defendant may move to dismiss within 14 days of
Plaintiff’s filing. Plaintiff may then respond to any motion and Defendant may reply,
as allowed under the Rules. If Plaintiff does not file an Amended Complaint within
the provided time, Defendant may renew this motion, which shall be granted.
SO ORDERED.
Dated: November 9, 2016
s/Terrence G. Berg
TERRENCE G. BERG
UNITED STATES DISTRICT JUDGE
Certificate of Service
I hereby certify that this Order was electronically submitted on November 9,
2016, using the CM/ECF system, which will send notification to all parties.
s/A. Chubb
Case Manager
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