Interstate Power Systems, Inc. v. General Electric Company
Filing
31
MEMORANDUM OPINION AND ORDER granting in part and denying in part 4 Motion for Preliminary Injunction (see Memorandum Opinion and Order for details) (Written Opinion). Signed by Judge Donovan W. Frank on 10/21/2011. (rlb)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Interstate Power Systems, Inc.,
Civil No. 11-2564 (DWF/JSM)
Plaintiff,
v.
MEMORANDUM
OPINION AND ORDER
General Electric Company,
d/b/a GE Energy,
Defendant.
________________________________________________________________________
Lee A. Henderson, Esq., Hessian & McKasy, PA, counsel for Plaintiff.
Mary P. Fritz, Esq., Ronn B. Kreps, Esq., and Sparrowleaf Dilts McGregor, Esq.,
Fulbright & Jaworski LLP, counsel for Defendant.
________________________________________________________________________
INTRODUCTION
This matter is before the Court on Plaintiff’s Motion for Preliminary Injunction
(Doc. No. [4]). For the reasons set forth below, the Court grants Plaintiff’s motion in part
by restoring Plaintiff’s discount pricing privileges in an effort to maintain the status quo
pending arbitration proceedings, but also refers the matter to arbitration and stays the
action accordingly.
BACKGROUND
Plaintiff Interstate Power Systems (“IPS”) is a Minnesota corporation that has
been in the industrial distribution business since 1957 and has been a North American
distributor for Waukesha Motor Company (“Waukesha”) since 1989. (Doc. No. 7,
Caswell Aff. ¶ 3.) In 1974, Dresser Industries, Inc. (“Dresser”) purchased Waukesha.
(Id. ¶ 5.) Dresser then continued to operate Waukesha until February 1, 2011, when
Defendant General Electric Company (“GE”) purchased Dresser. (Id.) Beginning in
February 2011, GE has served as the manufacturer of Waukesha products. (Id.)
Companies purchase Waukesha engines for use in various industrial and utility
applications, primarily for use in generators and industrial compressors. (Id. ¶ 7.) Until
its termination, IPS distributed Waukesha products throughout the north central United
States, with sales of Waukesha products, parts, and services that grew from $1 million
annually in 1999 to $4 million in 2010. (Id. ¶ 9.)
The Waukesha distribution system has in the past generally included
approximately eight to ten distributors covering sales territory across the entire
continental United States. (Id. ¶ 11.) Waukesha’s relationship with its distributors was
governed by a uniform Distribution, Service and Commission Agreement (“Distribution
Agreement”), which was provided to Waukesha distributors on a non-negotiable basis.
(Id. ¶ 12.) This agreement required that IPS and other distributors: (a) invest substantial
sums of money to maintain an inventory of replacement parts with facilities subject to the
approval of Waukesha; (b) maintain suitable service facilities; (c) employ a sufficient
number of competent service personnel; (d) spend their own money training their
employees; and (e) refrain from selling any competing products. (Id. ¶ 13 and Ex. C
(“Distribution Agreement”) at 2–5.) IPS signed the Distribution Agreement at issue in
December 2006. (Distribution Agreement at 13.) It was to remain in effect for three
years, unless earlier terminated. (Id.)
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The Distribution Agreement, by its terms, expired in 2009. (Id.) In late 2009,
Dresser advised its distributors that it was “exploring structural changes to its business
including a potential sale,” and advised the distributors that it would not issue updated
agreements at that time, but that their business relationships would continue. (Caswell
Aff. ¶ 16.) On July 20, 2010, Dresser issued an e-mail notice to its distributors stating
that Dresser would not be renewing any channel agreements, and that it would continue
to operate under existing channel agreements. (Caswell Aff., Ex. D (“Channel
Agreements Status & Certified Overall Program Update”).) If an existing channel
agreement had expired, the terms of that agreement would continue on a month to month
basis as if the prior contract had not expired. (Id.) This arrangement was to continue
until further notice. (Id.) In October 2010, Dresser announced that GE had agreed to
purchase Dresser in a $3 billion deal. (Caswell Aff. ¶ 18.) GE closed this transaction on
February 1, 2011 and assumed control of Dresser on that date. (Id. ¶ 19.)
On August 10, 2011, Patricia Bianco, Global Channel Director, GE Gas Engines,
hand-delivered a termination letter to IPS in Bloomington, Minnesota. (Id. ¶ 20.) This
letter provided that on November 10, 2011, ninety-three days after the delivery of the
letter, the Distribution Agreement and all extensions of the Agreement between IPS and
Waukesha would terminate. (Caswell Aff., Ex. E (“Termination Letter from Defendant
GE”).) Effective immediately on August 10, 2011, however, Waukesha appointed a
second distributor in IPS’s territory, eliminated all discounts provided in the Distribution
Agreement, and discontinued the “stock order discount” program previously in place.
(Id.) As a result of the termination letter, IPS was immediately limited to placing only
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emergency and customer parts orders and was no longer permitted to place stock or
forecast orders. (Id.) Shortly thereafter, Waukesha announced that it would have only
two North American distributors, Gas Drive and Waukesha-Pierce Industries (“WPI”).
(Caswell Aff. ¶ 23.) These two distributors were chosen from among the eight existing
Waukesha distributors. (Id.)
IPS contends that GE’s termination of IPS’s distributorship was statutorily
defective under the Minnesota Heavy and Utility Equipment Manufacturers and Dealers
Act (“HUEMDA”), Minn. Stat. §§ 325E.068–0684, and that the termination lacked good
cause, rendering the termination void and unenforceable.1 IPS argues that a preliminary
injunction is necessary to prevent irreparable harm, given its twenty-two year
distributorship relationship with Waukesha and the client relationships, revenue, and
goodwill that IPS will lose if it no longer distributes Waukesha products. (Caswell Aff.
¶¶ 29–31.) GE counters that all controversies regarding the Distribution Agreement are
subject to a valid and binding arbitration clause contained in the Distribution Agreement,
and that, therefore, IPS’s motion for preliminary injunction should be denied and this
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Specifically, HUEMDA provides that “[n]o equipment manufacturer . . . may
terminate, cancel, fail to renew, or substantially change the competitive circumstances of
a dealership agreement without good cause,” and that an equipment manufacturer must
provide an equipment dealer at least 90 days prior written notice of termination of the
dealership agreement, with an opportunity to cure the claimed deficiency and void the
termination within that notice period. Minn. Stat. § 325E.0681, subds. 1 and 2. GE
claims it had good cause to terminate the relationship and that “discovery will allow
further development of” that cause. (Doc. No. 19 at 11.) On October 11, 2011, the day
before the parties appeared before the Court to argue this motion, GE sent a letter to IPS
promising that a revised notice of termination would be forthcoming that “fully
articulate[s] cause for termination.” (Doc. No. 25, Ex. A.) As far as the Court is aware,
IPS has not received an amended notice of termination.
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case must be dismissed or stayed and referred to arbitration. (See Distribution
Agreement, Art. XIV, ¶ I (“Arbitration Clause”) at 18.)2
This Court concludes that the arbitration clause contained in the Distribution
Agreement applies to the parties’ dispute and orders that IPS’s claims be stayed pending
arbitration. In the meantime, however, to prevent irreparable harm and to ensure that the
arbitration proceedings are meaningful, the Court will preserve the status quo by
requiring that IPS retain discount pricing privileges given to Waukesha distributors
pending arbitration. See Minn. Stat. § 572B.08(a).
DISCUSSION
I.
Agreement to Arbitrate
In determining whether to compel arbitration, the Court must determine whether:
“(1) a valid agreement to arbitrate exists between the parties; and (2) the specific dispute
is within the scope of that agreement.” Airtel Wireless v. Montana Electronics Co., Inc.,
393 F. Supp. 2d 777, 786 (D. Minn. 2005) (citing Pro Tech Indus., Inc. v. URS Corp.,
377 F.3d 868 (8th Cir. 2004)). In this case, a valid agreement to arbitrate exists, and the
immediate dispute is within the scope of that agreement. Congress enacted the Federal
2
The Distribution Agreement executed by the parties in 2006 provides that the
Agreement will “at all times, including those at expiration or termination hereof, be
governed by and construed only under the laws of the State of Texas.” (Distribution
Agreement at 17.) However, HUEMDA provides that a choice of law provision in a
dealership agreement that is inconsistent with the terms of Minn. Stat. §§ 325E.068-0684,
or that purports to waive an equipment manufacturer’s compliance with the same, is void
and does not waive any rights provided under HUEMDA. Minn. Stat. §§ 325E.0683.
Here, GE may not evade Minnesota dealership statutes using a choice of law provision.
Accordingly, because IPS, as a party to the Distribution Agreement, is a Minnesota
corporation, the Court applies Minnesota law to the present motion.
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Arbitration Act (“FAA”) to declare “a national policy favoring arbitration when the
parties contract for that mode of dispute resolution.” Preston v. Ferrer, 552 U.S. 346,
349 (2008). Agreements to arbitrate in contracts “involving commerce” are “valid,
irrevocable, and enforceable, save upon grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. § 2.
The Distribution Agreement signed by the parties contains an agreement to
arbitrate “any controversy arising under or in relation to this agreement.” (Distribution
Agreement, Art. XIV ¶ I.)3 The parties dispute the validity and conditions of IPS’s
termination as a Waukesha distributor and IPS’s rights to retain discount pricing
privileges under the Distribution Agreement. The terms of a valid termination of the
distributorship relationship are outlined in the Distribution Agreement under “Term and
Termination” (Distribution Agreement, Art. XII at 13); therefore, this dispute does “arise
under” and relate to the Distribution Agreement.
The Court has noted, and the parties have addressed in letter briefs to the Court,
the inclusion of an unusual clause in this agreement to arbitrate that provides that
“nothing herein shall be construed to deny Waukesha the right to seek an injunction in
any court of competent jurisdiction.” (Id.) Other courts have held that similar clauses,
which preserve the drafting party’s right to bring claims in federal or state court while
forcing the non-drafting party (such as a franchisee) to submit all claims to binding
3
Substantially similar language also exists in the agreement’s General Terms of
Sale, requiring the parties to submit to binding arbitration “any dispute arising out of or
relating to this agreement, or the products and/or services provided hereunder” that
cannot be resolved by negotiation between executives. (Distribution Agreement at
28-29.)
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arbitration, are unconscionable and thus unenforceable as contracts of adhesion. See,
e.g., Ticknor v. Choice Hotels Intern., Inc., 265 F.3d 931 (9th Cir. 2001). Although the
provision granting Waukesha the right to seek injunctive relief in court makes the parties’
arbitration agreement arguably one-sided, the Court declines to rule that the presence of
this clause renders the entire arbitration agreement unconscionable and therefore
unenforceable. This is not a situation in which one contracting party possessed
significantly greater power or sophistication than the other, making such a clause
unconscionable in light of the imbalance in bargaining power. Rather, both IPS and
Waukesha are companies with revenues in the millions of dollars, and both are capable of
retaining experienced legal counsel in order to draft and negotiate distribution
agreements. Accordingly, the Court will refer the matter to arbitration as provided by the
parties in the Distribution Agreement and stay these proceedings.
II.
Preliminary Injunction
IPS urges the Court to enter a preliminary injunction barring GE from terminating
the Distribution Agreement, restoring to IPS all rights and privileges as a distributor
(including the right to buy products and parts at distributor discounts) and barring
Waukesha from appointing any other distributors in IPS’s existing territory pending a
final judgment in this case.
Due to the existence of a valid arbitration agreement, the Court will stay these
proceedings and refer the case to arbitration as set forth in the Distribution Agreement
between the parties. Notwithstanding the presence of a valid and binding arbitration
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agreement, the Court may craft a provisional remedy to accompany the stay that will
ensure that arbitration is meaningful and effective:
Before an arbitrator is appointed and is authorized and able to act, the court,
upon motion of a party to an arbitration proceeding and for good cause
shown, may enter an order for provisional remedies to protect the
effectiveness of the arbitration proceeding to the same extent and under the
same conditions as if the controversy were the subject of a civil action.
Minn. Stat. § 572B.08(a). In order to ensure the effectiveness of the arbitration
proceedings in this case, which could take place months from now, the Court will grant
IPS’s motion for preliminary injunction in part by restoring to IPS its right to buy
products at distributor discounts.
In its termination letter to IPS, GE indicated that IPS’s distributorship with
Waukesha would cease after ninety-three days. (Caswell Aff., Ex. E (“Termination
Letter from Defendant GE”).) This notice period is drawn from Article XII of the
Distribution Agreement (“Term and Termination”), which provides that the Distribution
Agreement “may be terminated at any time during the initial term and during any renewal
term by either party upon giving the other party not less than ninety-three (93) days
written notice of termination.” (Distribution Agreement at 13.) While the ninety-three
day notice period complies on its face with the Distribution Agreement, IPS’s inability to
place stock or forecast orders rendered it virtually unable to conduct any
Waukesha-related business beginning on August 10, 2011. In addition, because IPS has
dedicated itself to the Waukesha market for the past twenty-two years, and by contract
has been precluded from selling any competing products, IPS does not have an alternative
product source from which to replace its lost business. (Supplemental Aff. of Jeffrey
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Caswell at 7.) Based on these particular circumstances, regardless of the ninety-three day
notice period included in the August 10, 2011 termination letter, GE’s discontinuation of
discount pricing privileges for IPS effectively constitutes an immediate termination of the
Distribution Agreement.
The Court has also considered the factors enumerated in Dataphase Sys., Inc. v.
C L Sys., Inc., and finds that they further support injunctive relief on these facts. In order
to succeed in obtaining a preliminary injunction, the movant must demonstrate: (1) a
likelihood of success on the merits; (2) that the movant will suffer irreparable harm
absent injunctive relief; (3) that the balance of harms favors the movant; and (4) that the
public interest favors the movant. Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109,
113 (8th Cir. 1981). Requiring IPS to await arbitration proceedings while it is unable to
order Waukesha products at a discount rate would cause irreparable harm to IPS, and
would substantially change its competitive circumstances. See Minn. Stat. § 325E.0681,
subd. 1 (“No equipment manufacturer . . . may terminate, cancel, fail to renew, or
substantially change the competitive circumstances of a dealership agreement without
good cause.”). Also, because Minnesota law applies, and considering Minn. Stat.
§ 325E.0681, which prohibits termination of a distribution agreement without cause and
without notice, IPS is likely to succeed on the merits. In addition, significant public
policy concerns exist in this situation: allowing a discount pricing program to be
suspended pending arbitration would permit manufacturers to effectively evade statutory
protections for distributors by eliminating the security of a notice period. Because IPS is
likely to succeed on the merits of its case, because irreparable harm is likely to befall IPS
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if discount pricing privileges are not preserved pending arbitration, and because public
policy favors a true notice period before termination of a distributorship agreement, the
Court grants IPS’s motion for preliminary injunction to the limited extent it seeks to
maintain the pricing discounts in place before it received the August 10, 2011 termination
letter from GE.4
ORDER
Based upon the files, records, and proceedings herein, and for the reasons set forth
above, IT IS HEREBY ORDERED that:
1.
This matter is referred to arbitration as set forth in the parties’ Distribution
Agreement.
2.
This proceeding will be stayed pending arbitration of the parties’ claims.
3.
IPS’s Motion for Preliminary Injunction (Doc. No. [4]) is GRANTED IN
PART as follows:
a.
To the extent IPS seeks an order restraining and enjoining GE
from terminating the distribution agreement between IPS and Waukesha,
the motion is DENIED, and the matter is referred to arbitration.
b.
To the extent IPS seeks an order restoring its rights and
privileges as a distributor, specifically the right to buy products and parts at
4
The Court declines to grant the additional relief requested by IPS because the
Distribution Agreement did not contemplate an exclusive distributorship. (See
Distribution Agreement at 17 (“Waukesha reserves the right to appoint other Distributors
in the Territory if Waukesha determines that demand, market, service, or distribution
conditions in the Territory justify such further appointments.”))
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the same distributor discounts provided to active distributors, the motion is
GRANTED pending arbitration.
c.
To the extent IPS seeks an order barring Waukesha from
appointing any other distributors in IPS’s existing territory pending a final
judgment in this case, the motion is DENIED and the matter is referred to
arbitration.
4.
IPS shall post a bond in the amount of $250,000 before 5 P.M. on
October 28, 2011, but the Court’s requirement that a bond be posted shall not delay any
other relief awarded by this order.
Dated: October 21, 2011
s/Donovan W. Frank
DONOVAN W. FRANK
United States District Judge
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