D.A.R. 5235
WOLSEY, LTD., a Hong Kong corporation, Plaintiff-Appellee,
v.
FOODMAKER, INC., a Delaware corporation; Foodmaker
International Franchising, Inc., a Delaware
corporation, Defendants-Appellants.
No. 96-56345.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted Dec. 5, 1997.
Decided May 19, 1998.
J. Anthony Sinclitico, III, Alan B. Lawhead, Jeffrey L. Mengoli, Gibson, Dunn & Crutcher, L.L.P., San Diego, California, for defendants-appellants.
Dennis O'Dorisio, Lynn E. Wedell, R. Craig Zafis, Urquhart, O'Dorisio & Wedell, San Diego, California, for plaintiff-appellee.
Appeal from the United States District Court for the Southern District of California; William B. Enright, District Judge, Presiding. D.C. No. CV-96-634-E JFS.
Before: BEEZER, THOMPSON, and O'SCANNLAIN, Circuit Judges.
O'SCANNLAIN, Circuit Judge:
In this suit to compel arbitration, we must examine the interplay between federal and state law in the application of a contract's arbitration clause.
* In February of 1991, Foodmaker International ("Foodmaker"), a franchiser of Jack in the Box fast food restaurants, entered into a Development Agreement with Wolsey, Ltd. ("Wolsey"), a Hong Kong corporation, which gave Wolsey the right to develop Jack in the Box restaurants in Hong Kong and Macau for five years. The Development Agreement established a three-step dispute resolution process to be used for all disputes between Foodmaker and Wolsey: (1) a senior executive officer meeting; (2) non-binding arbitration under the rules of the American Arbitration Association; and (3) litigation in federal court.
In March of 1994, Wolsey invoked the dispute resolution procedure in the Development Agreement. Wolsey alleged that it had been fraudulently induced to enter into the Development Agreement by the express and implied misrepresentations of various Foodmaker executives that, if Wolsey successfully opened Jack in the Box restaurants in Hong Kong, Foodmaker would give Wolsey similar development rights to expand into China and extend Wolsey's development term in Hong Kong. Wolsey maintains that Foodmaker's president, Robert J. Nugent, conspired with Ta-Tung "Tony" Wang and QSR Management Company Limited ("QSR"), Wang's family owned company, to prevent Wolsey from developing restaurants in Asia so that QSR could develop the area itself.
After an unsuccessful meeting of the companies' senior executives in May 1994, Wolsey submitted the dispute to the American Arbitration Association. Wolsey asserted the following claims in the arbitration: (1) breach of contract; (2) breach of contract by hindrance of performance; (3) constructive fraud; (4) fraud in the inducement; (5) breach of the covenant of good faith and fair dealing; (6) interference with prospective economic advantage; (7) interference with contract; (8) breach of fiduciary duty; (9) unfair trade practices; and (10) unfair competition. After limited discovery and two weeks of arbitration, a Final Award of Arbitrators was issued in December of 1995. The panel determined Wolsey to be the prevailing party and rendered an award providing for various forms of relief, including an extension of Wolsey's development term for seven years and $200,000 for attorneys' fees.
Foodmaker declined to comply with the arbitration award. In April of 1996, Wolsey filed a complaint in federal court. In the complaint, Wolsey asserted claims for violations of the Lanham Act, the California Franchise Investment Law, and the Rackateer Influenced and Corrupt Organizations Act ("RICO"), none of which was asserted in the arbitration.1
Arguing that Wolsey's complaint asserted claims not advanced in the arbitration, Foodmaker moved to compel arbitration of those claims against the arbitration defendants.2 The district court denied the motion, and Foodmaker filed a timely appeal. We have jurisdiction over an appeal from an order denying a motion to compel arbitration under 9 U.S.C. § 16(a)(1)(C).
II
Section 19.3 of the Development Agreement between Wolsey and Foodmaker provides that "[e]xcept as provided in Section 19.2 hereof [pertaining to injunctions against Wolsey], all controversies, disputes or claims ... shall be submitted for non-binding arbitration." Foodmaker seeks to compel such arbitration pursuant to section 4 of the Federal Arbitration Act ("FAA"), which allows a party to an arbitration agreement to "petition any United States district court ... for an order directing that ... arbitration proceed in the manner provided for in [an arbitration] agreement." 9 U.S.C. § 4.
As a threshold matter, Wolsey maintains that the FAA does not apply to non-binding arbitration such as that provided for in the Development Agreement.3 The FAA does not specifically define the term "arbitration." In arguing that the FAA does not apply to non-binding arbitration, Wolsey relies on Section 2 of the Act, which provides:
A written provision in any maritime transaction or a 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 (emphasis added). Wolsey maintains that a provision in a contract to submit a controversy to non-binding arbitration is not a provision to "settle" a controversy. However, Wolsey's reliance on the use of the word "settle" in Section 2 of the FAA does not get it far. Black's Law Dictionary defines "settle" as:
A word of equivocal meaning; meaning different things in different connections, and the particular sense in which it is used may be explained by the context or surrounding circumstances. Accordingly, the term may be employed as meaning to agree, to approve, to arrange, to ascertain, to liquidate, to come to or reach an agreement, to determine, to establish, to fix, to free from uncertainty, to place, or to regulate.
Black's Law Dictionary 1230 (5th ed.1979).
Although the Ninth Circuit has never addressed whether the FAA applies to non-binding arbitration, other courts have. In AMF Inc. v. Brunswick Corp.,
Case law following the passage of the [Federal Arbitration] Act reflects unequivocal support of agreements to have third parties decide disputes--the essence of arbitration. No magic words such as "arbitrate" or "binding arbitration" or "final dispute resolution" are needed to obtain the benefits of the Act. See City of Omaha v. Omaha Water Co.,
. . . . .
Arbitration is a creature of contract, a device of the parties rather than the judicial process. If the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration.
Id. at 460 (emphasis added).
More recently, the Third Circuit adopted a slightly narrower definition of "arbitration" for purposes of the FAA in Harrison v. Nissan Motor Corp.,
Although it defies easy definition, the essence of arbitration, we think, is that, when the parties agree to submit their disputes to it, they have agreed to arbitrate these disputes through to completion, i.e. to an award made by a third-party arbitrator. Arbitration does not occur until the process is completed and the arbitrator makes a decision. Hence, if one party seeks an order compelling arbitration and it is granted, the parties must then arbitrate their dispute to an arbitrators' decision, and cannot seek recourse to the courts before that time.
Id. at 350 (emphasis added). The Third Circuit concluded that the alternative dispute resolution process contemplated by the Pennsylvania Lemon Law was inconsistent with this view of arbitration. The court reasoned that, because the Pennsylvania Lemon Law permits a dissatisfied car owner to "seek recourse to the courts" if he has not received a decision from the "arbitrator" within forty days, the dispute resolution process established by the statute would not be "pursue[d] ... to completion in all cases," and therefore would not "constitute arbitration within the meaning of the FAA." Id. at 351.
According to Judge Weinstein's analysis, parties agree to submit to arbitration under the FAA when they "agree[ ] to submit a dispute for a decision by a third party." See AMF Inc.,
We are persuaded that, under the reasoning adopted by these courts, the dispute resolution procedures established by section 19 of the Development Agreement between Wolsey and Foodmaker qualify as "arbitration" for purposes of the FAA. Section 19.3 of the Development Agreement provides:
Except as provided in Section 19.2 hereof [pertaining to injunctions against Wolsey], all controversies, disputes or claims ... shall be submitted for non-binding arbitration to the San Diego, California office of the American Arbitration Association on demand of either party. Such arbitration proceedings shall be conducted in Honolulu, Hawaii and, except as otherwise provided in this Agreement, shall be heard by three arbitrators in accordance with the then-current commercial arbitration rules of the American Arbitration Association.
Section 19.3 clearly provides for the submission of claims to "a third party." AMF Inc.,
A final factor weighing in favor of viewing the dispute resolution procedures provided for by the Development Agreement as "arbitration" is the presumption in favor of arbitrability created by the FAA. The FAA was designed "to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate," Dean Witter Reynolds Inc. v. Byrd,
The Arbitration Act establishes that, as a matter of federal law, any 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 the allegation of waiver, delay, or a like defense to arbitrability.
Id. at 24-25,
III
As the Supreme Court recognized in Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ.,
Wolsey argues that the Development Agreement incorporates California's arbitration rules through the agreement's choice-of-law clause, which provides: "[T]his Agreement between Foodmaker International and [Wolsey] shall be interpreted and construed under the laws of the State of California, U.S.A." Unlike the FAA, California's arbitration rules grant courts the discretion to stay arbitration proceedings pending resolution of related litigation. Specifically, Cal.Civ.Proc.Code Ann. § 1281.2(c) provides that when a court determines that
[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact[,] ... the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.
Cal.Civ.Proc.Code Ann. § 1281.2(c).
It is undisputed that Wolsey is "[a] party to the arbitration agreement [who] is also a party to a pending court action ... with ... third part[ies QSR and Wang], arising out of the same transaction or series of related transactions," and that "there is a possibility of conflicting rulings on a common issue of law or fact." Therefore, if Cal.Civ.Proc.Code Ann. § 1281.2(c) was incorporated into the Development Agreement, as the district court concluded, it was within the district court's discretion to deny Foodmaker's motion to compel arbitration.
In construing an arbitration agreement, courts must "apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan,
In deciding that the parties intended to incorporate California's procedural arbitration rules, including Cal.Civ.Proc.Code Ann. § 1281.2(c), into the Development Agreement, the district court relied on: (1) the textual proximity of the Development Agreement's arbitration clause and its choice-of-law clause, (2) an argument made in Foodmaker's brief during a discovery dispute before the arbitration panel, and (3) the arbitration panel's determination that the parties had agreed in the Development Agreement that California law would apply. In our view, none of these factors supports the district court's conclusion.
Prior to the arbitration hearing, Foodmaker and Wolsey disputed the scope of discovery allowed in a non-binding arbitration conducted under the rules of the American Arbitration Association. In a brief submitted to the arbitration panel, Foodmaker argued that the American Arbitration Association's rules require that the parties stipulate to any discovery in an arbitration proceeding. Foodmaker also argued that because the Development Agreement was to be interpreted under California law, which does not allow an arbitrator to order depositions in non-personal injury cases, no depositions should be permitted. The district court relied on Foodmaker's argument as evidence that the parties intended to apply California arbitration rules.
Under California law, "[t]he rule is well-settled that in construing the terms of a contract the construction given it by the acts and conduct of the parties with knowledge of its terms ... is admissible on the issue of the parties' intent." Southern California Edison Co. v. Superior Court,
We are persuaded that the district court was also incorrect to rely on the ruling of the arbitration panel as evidence of the parties' intent to apply section 1281.2(c). As we noted earlier, under California contract law, the "paramount consideration" is "the parties' objective intention at the time of contracting." Porreco,
Because the district court erred in relying on the arbitration discovery brief and the arbitration panel's ruling in determining that the Development Agreement incorporated Cal.Civ.Proc.Code § 1281.2(c), the question whether the district court was correct to deny Foodmaker's motion to compel arbitration turns on the propriety of applying state arbitration rules when a contract contains both an agreement to arbitrate and a general choice-of-law clause in the same section. In addressing this issue, we are guided by the Supreme Court's decision in Mastrobuono v. Shearson Lehman Hutton, Inc.,
Mastrobuono involved the interpretation of a contract that was similar in many respects to the Development Agreement between Wolsey and Foodmaker. The Mastrobuono contract contained an arbitration provision and a choice-of-law provision in the same paragraph.4 See id. at 58,
The Supreme Court reversed. See Mastrobuono,
The choice-of-law provision, when viewed in isolation, may reasonably be read as merely a substitute for the conflict-of-laws analysis that otherwise would determine what law to apply to disputes arising out of the contractual relationship. Thus, if a similar contract, without a choice-of-law provision, had been signed in New York and was to be performed in New York, presumably "the laws of the State of New York" would apply, even though the contract did not expressly so state. In such event, there would be nothing in the contract that could possibly constitute evidence of an intent to exclude punitive damages claims. Accordingly, punitive damages would be allowed because, in the absence of contractual intent to the contrary, the FAA would pre-empt the Garrity rule....
Even if the reference to "the laws of the State of New York" is more than a substitute for ordinary conflict-of-laws analysis and, as respondents urge, includes the caveat, "detached from otherwise-applicable federal law," the provision might not preclude the award of punitive damages because New York allows its courts, though not its arbitrators, to enter such awards. See Garrity,
Id. at 60,
More important than the meaning of the choice-of-law clause or the arbitration clause alone, the Court held, was "the meaning of the two provisions taken together." Id. at 59,
We think the best way to harmonize the choice-of-law provision with the arbitration provision is to read "the laws of the State of New York" to encompass substantive principles that New York courts would apply, but not to include special rules limiting the authority of arbitrators. Thus, the arbitration provision covers the rights and duties of the parties, while the choice-of-law clause covers arbitration; neither sentence intrudes upon the other.
Id. at 63-64,
Applying Mastrobuono, the Development Agreement between Foodmaker and Wolsey should not be read to incorporate Cal.Civ.Proc.Code Ann. § 1281.2(c). Like the contract in Mastrobuono, the Development Agreement contains an arbitration clause and a general choice-of-law clause, but does not contain a specific reference to the state arbitration rule at issue. Therefore, pursuant to Mastrobuono, the relevant question is whether section 1281.2(c) is a "substantive principle that [California] courts would apply" or is instead "a special rule[ ] limiting the authority of arbitrators." Id. at 64,
In arguing that, despite the Supreme Court's recent decision in Mastrobuono, the Development Agreement should be read as incorporating Cal.Civ.Proc.Code Ann. § 1281.2(c), Wolsey relies heavily on the Supreme Court's earlier decision in Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ.,
Unlike the Volt Court, which declined to review a state court's interpretation of a private contract, we must interpret the Development Agreement between Wolsey and Foodmaker. In Mastrobuono, the Supreme Court distinguished Volt as follows:
The dissent makes much of the similarity between this choice-of-law clause and the one in Volt, which we took to incorporate a California statute allowing a court to stay arbitration pending resolution of related litigation. In Volt, however, we did not interpret the contract de novo. Instead, we deferred to the California court's construction of its own state law.
Mastrobuono,
IV
We reverse the district court's denial of Wolsey's motion to compel arbitration and remand for further proceedings consistent with this opinion.
REVERSED and REMANDED.
Notes
The complaint was filed not only against Foodmaker, but also against Foodmaker officers Jack Goodall and Robert Nugent and Foodmaker director Kenneth Williams, none of whom was a party to the arbitration. However, on February 5, 1998, Wolsey voluntarily dismissed with prejudice its claims against Goodall, Nugent, and Williams pursuant to Federal Rule of Civil Procedure 41(a)(1)
The district court later dismissed Wolsey's California Franchise Investment Law claim and its RICO claim, both with prejudice. Wolsey filed a motion for reconsideration of the district court's order dismissing its RICO claim, but the motion was denied. Therefore, Wolsey's Lanham Act claim is the only remaining claim that was not asserted in the arbitration
The district court apparently assumed without deciding that the dispute resolution procedures provided for in the Development Agreement qualified as "arbitration" for purposes of the FAA
In the Development Agreement between Wolsey and Foodmaker, the arbitration provision is contained in section 19.3, whereas the choice-of-law provision is contained in section 19.9