Aqualucid Consultants v. Zeta Corp.
17-1217
| 6th Cir. | Dec 27, 2017Background
- Aqualucid (joint venture formed by David Morrison and Zeta’s Michael Pitts) contracted with Zeta under a Professional Services Agreement (PSA) covering cooperation to pursue a government CRADA; the PSA contained a broad mandatory arbitration clause and a Michigan forum-selection clause.
- Aqualucid withdrew from the CRADA in 2008 and filed an earlier Texas suit (dismissed without prejudice) that never raised arbitration.
- Plaintiffs filed the present suit in federal court in Michigan in 2014 asserting numerous claims (contract, tort, IP, RICO, Lanham Act, Michigan Consumer Protection Act, fraud, etc.).
- Defendants initially moved to dismiss for lack of personal jurisdiction or to transfer; the district court noted the PSA governed the action and ordered answer and further briefing; Defendants’ first answer and filings did not assert arbitration.
- After procedural delay and court-ordered briefing changes, Defendants raised the arbitration defense in a renewed Rule 12(c) motion about two years after suit began; no discovery had occurred and Plaintiffs could not show prejudice from the delay.
- The district court found the PSA governed the dispute, declined to adjudicate fraud-in-the-inducement challenges to the entire PSA (leaving that to arbitrator), concluded Defendants had not waived arbitration, and dismissed the action in favor of arbitration. The Sixth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability of PSA when plaintiff alleges fraud-in-the-inducement | Fraud makes the entire PSA (including arbitration clause) unenforceable | Fraud challenge is to the contract generally, not the arbitration clause specifically; arbitrator should decide contract validity | Court: challenge to the contract (not the arbitration clause itself) is for arbitrator (Buckeye/Prima Paint line) — arbitration enforced |
| Waiver of right to arbitrate by delay | Zeta waived arbitration by waiting ~2 years and litigating (including earlier suit) | Delay largely caused by court scheduling; no substantive litigation or discovery occurred; plaintiffs cannot show actual prejudice | Court: No waiver — plaintiff failed to prove actual prejudice; strong FAA presumption favors arbitration (Hurley/O.J. Distrib./Shy) |
| Breach of PSA by defendants (refusal to arbitrate earlier) | Emails show defendants refused dispute resolution, so they breached arbitration covenant | Emails concerned the CRADA or government and do not show a refusal to arbitrate under the PSA; refusal pre-litigation over claim weakness is not waiver | Court: No breach or waiver; communications do not show a refusal to arbitrate under PSA (Shy) |
| Scope of arbitration clause — do plaintiffs’ many claims fall outside PSA? | Some claims (RICO, Lanham Act, torts) are independent and outside the PSA’s scope | All claims relate to or rely on the PSA (money, information, breaches); plaintiffs previously relied on PSA forum-selection clause | Court: All asserted claims arise out of or relate to PSA and are within arbitration clause (Fazio-style analysis) |
Key Cases Cited
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (arbitrator decides challenges to contract validity unless challenge is to arbitration clause itself)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (same principle regarding separability of arbitration clause)
- Hurley v. Deutsche Bank Trust Co., 610 F.3d 334 (FAA presumption; waiver requires inconsistent conduct and prejudice)
- O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345 (elements for waiver: inconsistent acts + actual prejudice)
- Shy v. Navistar Int’l Corp., 781 F.3d 820 (refusal to arbitrate before litigation over weak claims does not necessarily waive arbitration)
- Johnson Assocs. Corp. v. HL Operating Corp., 680 F.3d 713 (example of prejudice where discovery and scheduling costs were nontransferable to arbitration)
- Fazio v. Lehman Bros., Inc., 340 F.3d 386 (test for whether claims fall within contract/arbitration scope)
- Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc., 350 F.3d 568 (arbitrability principles and role of arbitrator in fraud-in-the-inducement disputes)