NTCH-West Tenn, Inc. v. ZTE USA, Inc.

Filing 100

ORDER ACCEPTING MAGISTRATE JUDGES REPORT AND RECOMMENDATION AND GRANTING DEFENDANTS MOTION TO COMPEL ARBITRATION. Signed by Judge J. Daniel Breen on 1/22/13. (Breen, J.)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
EASTERN DIVISION
NTCH-WEST TENN, INC.,
Plaintiff,
v.

No. 1:11-cv-01169-JDB-egb

ZTE USA, INC.,
Defendant.

ORDER ACCEPTING MAGISTRATE JUDGE’S REPORT AND RECOMMENDATION
AND GRANTING DEFENDANT’S MOTION TO COMPEL ARBITRATION
_____________________________________________________________________________

Before the Court is the objection of Plaintiff, NTCH-West Tenn., Inc.’s (“NTCH”), to the
Magistrate Judge’s report and recommendation (Docket Entry (“D.E.”) 93), recommending that
the Court grant Defendant, ZTE-USA, Inc.’s (“ZTE”), motion to compel arbitration. Upon
review of Plaintiff’s objections, the report and recommendation is ACCEPTED, and the
Defendant’s motion to compel arbitration is GRANTED.
I.

Factual and Procedural Background

On September 21, 2006, PTA-FLA, Inc., an affiliate of NTCH located in Florida, entered
into a Master Supply Agreement (“MSA”) with ZTE wherein PTA-FLA would purchase cellular
network equipment from Defendant for use in Jacksonville, Florida. (Compl. at ¶ 8.) During
installation, a number of compatibility issues arose with the equipment in contravention to the
MSA’s guarantees. (Id. at ¶¶ 11-12.) ZTE assured PTF-FLA that it would work to resolve these
problems but a solution was never reached. (Id. at ¶¶ 13-14.)

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In 2008, PTA-FLA sold its Jacksonville network to Metro PCS, which did not purchase
the ZTE equipment. (Id. at ¶ 15.) Metro PCS requested that the equipment be removed from its
grid and Defendant agreed to move it from Jacksonville to Jackson, TN for use by the Plaintiff.
(Id. at ¶ 16.) NTCH paid a $150,000 “integration service fee” to the Defendant for its transfer
and installation with ZTE assuring NTCH that the equipment would function properly in
Tennessee. (Id. at ¶¶ 17-18.) However, after it was installed in November of 2009, NTCH
continued to experience compatibility and configuration problems which Defendant was never
fully able to resolve. (Id. ¶¶ 19-22.) As a result, Plaintiff was forced to abandon the use of ZTE’s
product and replace the equipment at significant expense. (Id. at ¶ 35.)
On April 25, 2011, Plaintiff filed a complaint in the Chancery Court of Madison County,
Tennessee against ZTE which it removed to this Court based on diversity of citizenship, 28
U.S.C. § 1332. (D.E. 1.) On June 13, 2011, ZTE filed its first Motion to Compel Arbitration,
which the Magistrate Judge recommended granting. (D.E. 8, 22.) NTCH filed objections, with
which the Court agreed, finding that the motion should be denied. (D.E. 45.) Defendant appealed
that ruling to the Sixth Circuit Court of Appeals, which remanded the issue of arbitrability to this
Court pending the outcome of the instant motion. (D.E. 95.) In the time period between the
issuance of the Magistrate Judge’s report and the Court’s rejection of Defendant’s first
arbitration motion, NTCH entered into a new agreement to arbitrate. (Demand for Arbitration,
D.E. 47-10).
On April 20, 2012, Defendant filed a second motion to compel arbitration based on this
new agreement, to which the Plaintiff opposed. (D.E. 49.) NTCH claimed that Defendant
repudiated the agreement by withdrawing the claims against ZTE Corp. (ZTE’s parent
corporation) from the arbitration, and could therefore not enforce the arbitration agreement.

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(D.E. 51.) Additionally, Plaintiff moved for a preliminary injunction requesting that the Court
relieve it from participating in arbitration of its claims against the Defendant. (D.E. 77.) Both
motions were referred to the Magistrate Judge who on October 31, 2012, recommended that
Defendant’s second motion to compel arbitration be granted. On November 13, NTCH objected
to the report and the Defendant responded. (D.E. 94.)
II.

Standard of Review

According to 28 U.S.C. § 636(b)(1) and Rule 72(b)(3) of the Federal Rules of Civil
Procedure, a district judge ruling on an objection to a magistrate judge’s recommendation must
apply a de novo standard of review. “The district judge may accept, reject, or modify the
recommended disposition; receive further evidence; or return the matter to the magistrate judge
with instructions.” Fed. R. Civ. P. 72(b)(3). The Court has reviewed the Plaintiff’s objections and
addresses them below.
III.

Analysis

The heart of Plaintiff’s objection is whether or not the issue of arbitrability was submitted
to the arbitrator, and if so whether he ruled on the matter. NTCH contends that the arbitrator
reserved the issue for this Court to decide and consequently, submits that its claims against ZTE
are not subject to any arbitration agreement. Plaintiff also argues that Defendant repudiated the
agreement, or alternatively, that there was no meeting of the minds between the parties as to the
agreement. The Court concludes that the arbitrator did rule on the matter of arbitrability which
ruling is subject to deferential treatment. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
943, 115 S. Ct. 1920, 1923, 131 L. Ed. 2d. 985 (1995) (“[T]he court should give considerable
leeway to the arbitrator, setting aside his or her decision only in certain narrow circumstances.”).
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While it is unnecessary to evaluate Plaintiff’s substantive arguments as the Court defers to the
arbitrator on the issue, the Court also finds that they are without merit.
In its objection to the Magistrate Judge’s report, Plaintiff admits that it entered into an
agreement with Defendant to submit its claims to binding arbitration. (D.E. 94, p. 2.) (“Plaintiff
submitted its claims to arbitration voluntarily pursuant to an agreement (the ‘Arbitration
Agreement’) it had reached with Defendant.”); (see also D.E. 51, p. 7.) (“In December of 2011,
NTCH-TN did enter into a new agreement with ZTE USA and ZTE Corp. to submit all claims
between the parties to binding arbitration.”) Since entering into the agreement, both NTCH and
ZTE USA have actively participated in arbitration, with Plaintiff voluntarily submitting a
number of issues to the arbitrator for determination. (Plaintiff’s Demand for Arbitration, D.E. 4710). Among these is whether the arbitrator was permitted to rule on the question of arbitrability
of the claims presented, an issue which Plaintiff asserted and argued in support of on multiple
occasions. (See D.E. 76-1) (“Claimants will address the following issues…1) The Tribunal’s
Power to Decide Arbitrability Questions in This Case”); (D.E. 76-2.) (“The Arbitrator Has the
Authority to Determine Arbitrability.”) NTCH also submitted several supplemental questions
related to the arbitrability of its claims, including whether ZTE Corp. had repudiated the
agreement and whether the parties had a meeting of the minds when contracting the arbitration
agreement - the same issues the Plaintiff now asserts in the instant objection to support its
position that its claims are not arbitrable. While ZTE initially contested the ability of the
arbitrator to determine arbitrability, it ultimately acquiesced and allowed the arbitrator to rule on
the issue. (D.E. 76-2.) (“Respondents now correctly acknowledge that the arbitrator may decide
arbitrability, as they appear to have abandoned their argument to the contrary.”). This conduct
clearly signaled that the parties intended for the arbitrator to rule on the matter, Vic Wertz

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Distrib. Co. v. Teamsters Local 1038, 898 F.2d 1136, 1140 (6th Cir. 1990) (“[a]greement to have
the arbitrator decide the issue of arbitrability ‘may be implied from the conduct of the parties in
the arbitration setting’”), and as such, the arbitrator found that the claims between NTCH and
ZTE were arbitrable. (D.E. 70-1) (“I determine that the arbitration includes the claims,
counterclaims, and defenses that may or will exist in the Tennessee lawsuit until and unless a
court order removes that matter from the arbitration.”).
After a complete review of the record, the question of arbitrability was undoubtedly
submitted to the arbitrator and he ruled accordingly. While this type of determination is generally
reserved for the courts, “if the parties ‘clearly and unmistakably’ submit the issue [of
arbitrability] to the arbitrator ‘without reservation,’ then the parties have waived their right to
have a court make the decision.” Printing Serv. Co. v. Graphic Commc’n Conference of the
Intern. Broth. Of Teamsters, Local 508 of Council 3, No. 11-3288, 2012 WL 3121266, at *2 (6th
Cir. Aug. 2, 2012) (citing Cleveland Elec. Illuminating Co. v. Utility Workers Union of Am.,
440 F.3d 809, 813 (6th Cir. 2006). Here, because NTCH requested that the arbitrator consider
whether the Tennessee claims were arbitrable, it would not be entitled to a de novo review by the
Court. See Vic Wertz. 898 F.2d at 1140 (“Because the parties clearly and unmistakably
submitted the issue of arbitrability to the arbitrator without reservation, we will review the
arbitrator’s decision on arbitrability under the same deferential standard employed when
reviewing an arbitrator’s ruling on the merits.”); see also Cleveland Elec., 440 F.3d at 813 (“The
company waived its right to have the court decide the arbitrability question by participating in
the arbitration proceedings.”). Rather, “the arbitrator’s decision is entitled to a deferential
review.” Id. at 814 (“The arbitrator’s decision will not be disturbed unless it fails to draw its
essence from the [agreement].”); see also First Options of Chicago 514 U.S. at 943, 115 S. Ct. at

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1923. Therefore, as the arbitrator’s ruling stems from a reasonable interpretation of the
arbitration agreement, the Court defers to his decision, that unless this Court reserved the matter
for itself, which it has not done, he may arbitrate all claims from the Tennessee lawsuit.
Plaintiff claims that the arbitrator reserved the issue of arbitrability for the Court;
however, a plain reading of the ruling suggests otherwise. Had he intended to reserve the issue,
he would not have stated that he was allowing the arbitration to move forward. The question of
arbitrability is a threshold matter, and it would be inconsistent to declare that the arbitration
proceed without first ruling on it. When the arbitrator stated that “the arbitration includes the
claims, counterclaims, and defenses that may or will exist in the Tennessee lawsuit,” (D.E. 70-1.)
he was offering his determination on arbitrability. The statement “unless a court order removes
that matter from the arbitration” (Id.) was simply qualifying language acknowledging that the
Court had the ultimate say on the issue.
While not necessary to the ultimate decision, the Court will also address the Plaintiff’s
arguments regarding repudiation and lack of mutual assent. With respect to the repudiation
argument, there is no evidence that ZTE, the defendant in this case, has renounced or indicated
an intention to dishonor its obligations under the arbitration agreement. ZTE has been, and
continues to be, a full and active participant in the arbitration proceedings. (See, e.g., D.E. 49-116.) ZTE Corp. is not a party to the instant action, and the fact that ZTE asserted a legal defense
in arbitration to have those claims against ZTE Corp. removed does not amount to repudiation.
See Drake Bakeries, Inc. v. Local 50, Am. Bakery & Confectionary Workers Int’l, AFL-CIO,
370 U.S. 254, 262 n. 10, 82 S.Ct. 1346, 1351 8 L.Ed.2d 474 (1962) (quoting 6 Corbin, Contracts
§ 1443 (1961 Supp., n. 34, pp. 192-193)

(“One who flatly repudiates the provision for

arbitration itself should have no right to the stay of a court action brought by the other party. But

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mere nonperformance, even though unjustified, is not per se a ‘repudiation.’ One who asserts in
good faith that the facts justify him in refusing performance of other provisions in the contract
should not thereby lose his right to arbitration that he would otherwise have had.”)
The Court also finds Plaintiff’s argument that there was no “meeting of the minds” to be
unpersuasive. NTCH contends that had they known they would not be permitted to include their
claims against ZTE Corp. in arbitration, they would not have agreed to arbitrate any of its claims.
In Tennessee, a court’s assessment of mutual assent is through an objective analysis of the
party’s expressions. Staubach Retail Servs.-Southeast, LLC v. H.G. Hill Realty Co., 160 S.W.3d
521, 524 (Tenn. 2005) (citing T.R. Mills Contractors, Inc. v. WRH Enters., LLC, 93 S.W.3d 861,
866 (Tenn. Ct. App. 2002). Here, it is clear from the record that the arbitration agreement was
reached in order to consolidate a number of claims “pending” in courts nationwide by Plaintiff
and its affiliates against ZTE. (D.E. 65-1, ¶ 15-16.) There is nothing in the agreement or the
communications leading up to it suggesting that ZTE intended to allow claims against its parent
corporation, which had not yet been filed in any court, to be arbitrated. NTCH cites Cone Oil
Co., Inc. v. Green, 669 S.W.2d 662 (Tenn. Ct. App. 1983), for the proposition that “a secret,
unexpressed intent of one party to a contract is not binding upon the other party who has no
notice of the secret intent.” Id. at 664. Plaintiff argues that ZTE’s intent not to have those claims
against ZTE Corp. arbitrated was undisclosed and therefore should not be binding. However,
from a review of the agreement and negotiations, there is no evidence to indicate that Defendants
harbored such an intent. Plaintiff cannot claim that there was no “meeting of the minds” simply
because it failed to include specific and clear language in the arbitration agreement subjecting
any non-pending claims against ZTE Corp. to arbitration. Here the contract was reached without
fraud, undue influence, or violations of public policy and must therefore be enforced based on an

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objective reading of the party’s manifestations. Staubach, 160 S.W.3d at 524 (“A contract must
result from a meeting of the minds of the parties in mutual assent to the terms, must be based
upon a sufficient consideration, free from fraud or undue influence, not against public policy and
sufficiently definite to be enforced.”) (internal citations omitted).
Accordingly, the Court finds that the arbitrator issued a decision on the arbitrability of
Plaintiff’s claims and defers to its judgment. Furthermore, the Court finds Plaintiff’s arguments
regarding revocation or mutual assent unpersuasive. Therefore, the Magistrate Judge’s report
and recommendation is ACCEPTED and ZTE’s motion to compel arbitration is GRANTED.
IT IS SO ORDERED this 22nd day of January, 2013.

s/ J. DANIEL BREEN
UNITED STATES DISTRICT JUDGE

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